EV/EBITDA: The Go-To Metric for Cross-Industry Comparison

Concepts

Why Do We Need EV/EBITDA?

The P/E ratio is handy, but it has a blind spot: it only looks at things from the shareholder's perspective. Two companies with identical earnings -- one debt-free and the other heavily leveraged -- may show similar P/E ratios, yet their risk profiles are completely different.

EV/EBITDA solves this problem. It takes the perspective of the "entire enterprise," considering both shareholders and creditors, so companies with different capital structures can be compared on a level playing field.

What Is EV (Enterprise Value)?

EV stands for Enterprise Value. The formula:

EV = Market Cap + Total Debt - Cash & Cash Equivalents

Why is it calculated this way? Imagine you want to buy an entire company:

• You pay the market cap (to acquire all outstanding shares)
• You also take on the company's debt (its obligations become yours)
• But you can use the cash sitting on the balance sheet (so you subtract it)

In other words, EV represents the true cost of acquiring the entire business.

What Is EBITDA?

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. The formula:

EBITDA = Operating Income + Depreciation + Amortization

It can also be expressed as:

EBITDA = EBIT + Depreciation & Amortization

Why add back depreciation and amortization? Because D&A are accounting expenses, not actual cash outflows -- the money for equipment and facilities was already spent. Adding them back makes EBITDA a closer proxy for the cash a business generates from its core operations.

Why exclude interest and taxes? Interest depends on the company's borrowing structure, and tax rates are affected by various deductions and credits. Stripping them out better reflects the company's "pure operating performance."

How to Interpret EV/EBITDA

EV/EBITDA = Enterprise Value / EBITDA

This number tells you: if you bought the entire company at its current price, how many years of EBITDA would it take to recoup your investment.

A lower multiple means the company is theoretically cheaper. Typical ranges by industry:

• Technology: 15-25x (high growth expectations)
• General Manufacturing: 8-12x
• Utilities: 6-9x (stable but low growth)
• Commodities / Energy: 4-8x (highly cyclical)
• Retail: 8-14x

Advantages of EV/EBITDA

1. Cross-industry comparability: By removing differences in capital structure and tax rates, companies across different industries can be compared side by side
2. Widely used in M&A: One of the most common multiples used by investment banks when evaluating acquisition prices
3. Eliminates accounting differences: Different companies have different depreciation policies; EBITDA neutralizes that variable
4. Works for loss-making companies: Some companies report a net loss but have positive EBITDA -- P/E breaks down in those cases, but EV/EBITDA still works

Hands-On: Using CTSstock

1. Go to /analysis/2330 (using TSMC as an example)
2. Click the "Valuation" tab at the top
3. Find the EV/EBITDA valuation model
4. You can see:
   • The current EV/EBITDA multiple
   • The historical EV/EBITDA range
   • Fair enterprise value and stock price under different multiple assumptions
5. This is especially useful for cross-company comparisons: among several companies in the same industry, the one with the lowest EV/EBITDA may be a relatively undervalued pick
6. Cross-check with other valuation methods (P/E, DCF) for more reliable results

FAQ

Q: Which is better -- EV/EBITDA or P/E? A: Each has its place. P/E is simple and intuitive, great for quick screening; EV/EBITDA is more rigorous, better suited for in-depth analysis and cross-company comparisons. Ideally, use both.

Q: What are the drawbacks of EBITDA? A: EBITDA ignores capital expenditures. For companies that require heavy equipment investment (such as semiconductor fabs), EBITDA overstates actual cash generation. In those cases, looking at free cash flow alongside EBITDA gives a more complete picture.

Q: Why is EV/EBITDA negative for some companies? A: Usually because the company holds more cash than its market cap plus debt (making EV negative), or because EBITDA is negative. In such extreme cases, the metric is not applicable and other valuation methods should be used.