{"concept":{"id":72,"slug":"ev-ebitda","term":"EV/EBITDA","shortDefinition":"A multiple that compares a company's full value -- market cap plus net debt -- with its EBITDA, neutralizing the effect of its financing structure.","longDefinition":"EV/EBITDA compares a company's Enterprise Value -- its full value, calculated by adding net financial debt to market capitalization, already covered in Level 1 -- with its EBITDA, a variant of operating income, already covered in Level 2, that adds back depreciation and amortization. Unlike the P/E ratio, EV/EBITDA neutralizes the effect of how the company is financed -- the same spirit that led ROIC, already covered in Level 2, to look at total invested capital instead of equity alone -- which lets you compare companies with very different debt levels."},"relations":{"requirement":[],"contrast":[],"related":[{"concept":{"id":70,"slug":"valuation-multiple","term":"Valuation multiple","shortDefinition":"A ratio that compares a company's price with one of its financial figures -- earnings, EBITDA, or book value -- to value it by comparison with other companies.","longDefinition":"A valuation multiple compares a company's price -- its market price or its full enterprise value -- with one of its own financial figures, to estimate its value by comparison with similar companies, instead of projecting its future cash flows the way a DCF does. It's the second main family of valuation methods. The three most-used multiples are the P/E ratio (price versus net income), EV/EBITDA (enterprise value versus EBITDA), and P/B (price versus equity), each more informative depending on the type of company and its financing structure. No multiple means anything on its own: it's only useful compared with that of reasonably similar companies."}}],"calculatedBy":[{"concept":{"id":7,"slug":"market-capitalization","term":"Market capitalization","shortDefinition":"The total market value of all of a company's shares -- the result of multiplying a share's price by the total number of shares outstanding.","longDefinition":"Market capitalization is not the same as \"the value of the company\": it's an estimate based on what the market is willing to pay for its shares at a given moment, which can differ from book value or the intrinsic value a fundamental analysis would estimate. It's the standard measure for classifying companies by size (large-, mid-, or small-cap) and for weighting many stock market indices -- the larger a company's market cap, the more weight it typically carries in the index calculation."}}]},"curricularPosition":[{"id":58,"moduleId":21,"slug":"what-are-pe-ev-ebitda-and-pb","title":"What are the P/E ratio, EV/EBITDA, and P/B?","summary":"You know the three most-used valuation multiples, what question each one answers, and why none is automatically better than the others.","bodyMarkdown":"## Objectives\n\nBy the end of this lesson you know the three most-used valuation multiples -- P/E ratio, EV/EBITDA, and P/B -- what question each one answers, and why none is automatically better than the others.\n\n## Content\n\nThis level's Module 1 introduced comparable multiples as the second main family of valuation methods, alongside the DCF already developed in the previous module. This lesson develops the three multiples most used in practice.\n\nThe P/E ratio compares a share's price with the net income attributable to it -- the company's net income, already covered in Level 2, divided across the number of shares. A P/E of 15 means, simplified, that the market is paying fifteen times the company's current annual net income to own it. It's the most-cited multiple, but it carries the same problem as net income: the effect of how the company is financed.\n\nEV/EBITDA responds to that problem from another angle. It compares the company's Enterprise Value -- its full value, calculated by adding net financial debt to market capitalization, already covered in Level 1 -- with its EBITDA, a variant of operating income, already covered in Level 2, that adds back depreciation and amortization. By including debt in the numerator and using an earnings figure that doesn't subtract interest, EV/EBITDA neutralizes the effect of the financing structure -- the same spirit that led ROIC, already covered in Level 2, to look at total invested capital instead of equity alone.\n\nP/B compares a share's price with the equity attributable to it, already covered in Level 2. It's especially informative for asset-intensive companies -- where what the company owns is a relevant reference -- or for financial institutions. In businesses with few tangible assets, like many service companies, it tends to say much less than the P/E ratio or EV/EBITDA.\n\nNone of the three multiples is automatically the right one: each answers a different question, and the choice depends on the type of company and what you want to neutralize -- the financing structure, in the case of EV/EBITDA, or the weight of assets, in the case of P/B.\n\n## Example\n\nTwo companies in the same sector, one with much more debt than the other, can show a very different P/E and yet a similar EV/EBITDA -- precisely because EV/EBITDA neutralizes the effect of that financing difference that the P/E doesn't filter out.\n\n## Common mistakes\n\n- Comparing the P/E of two companies with very different financing structures without accounting for the fact that net income carries the effect of debt -- that's exactly what EV/EBITDA exists for.\n- Treating P/B as equally informative for any company -- it says a lot for asset-intensive or financial businesses, and little for businesses with limited tangible assets.\n\n## Summary\n\nThe P/E ratio compares price with net income per share, EV/EBITDA compares the company's full value with its EBITDA while neutralizing the financing structure, and P/B compares price with equity per share. Each answers a different question and is more or less informative depending on the company.\n\n## Self-check\n\nWhy can EV/EBITDA be more comparable between companies with different financing structures than the P/E ratio?\n\nIn what type of companies is P/B usually more informative?","bodyHtml":"

Objectives

\n

By the end of this lesson you know the three most-used valuation multiples -- P/E ratio, EV/EBITDA, and P/B -- what question each one answers, and why none is automatically better than the others.

\n

Content

\n

This level's Module 1 introduced comparable multiples as the second main family of valuation methods, alongside the DCF already developed in the previous module. This lesson develops the three multiples most used in practice.

\n

The P/E ratio compares a share's price with the net income attributable to it -- the company's net income, already covered in Level 2, divided across the number of shares. A P/E of 15 means, simplified, that the market is paying fifteen times the company's current annual net income to own it. It's the most-cited multiple, but it carries the same problem as net income: the effect of how the company is financed.

\n

EV/EBITDA responds to that problem from another angle. It compares the company's Enterprise Value -- its full value, calculated by adding net financial debt to market capitalization, already covered in Level 1 -- with its EBITDA, a variant of operating income, already covered in Level 2, that adds back depreciation and amortization. By including debt in the numerator and using an earnings figure that doesn't subtract interest, EV/EBITDA neutralizes the effect of the financing structure -- the same spirit that led ROIC, already covered in Level 2, to look at total invested capital instead of equity alone.

\n

P/B compares a share's price with the equity attributable to it, already covered in Level 2. It's especially informative for asset-intensive companies -- where what the company owns is a relevant reference -- or for financial institutions. In businesses with few tangible assets, like many service companies, it tends to say much less than the P/E ratio or EV/EBITDA.

\n

None of the three multiples is automatically the right one: each answers a different question, and the choice depends on the type of company and what you want to neutralize -- the financing structure, in the case of EV/EBITDA, or the weight of assets, in the case of P/B.

\n

Example

\n

Two companies in the same sector, one with much more debt than the other, can show a very different P/E and yet a similar EV/EBITDA -- precisely because EV/EBITDA neutralizes the effect of that financing difference that the P/E doesn't filter out.

\n

Common mistakes

\n\n

Summary

\n

The P/E ratio compares price with net income per share, EV/EBITDA compares the company's full value with its EBITDA while neutralizing the financing structure, and P/B compares price with equity per share. Each answers a different question and is more or less informative depending on the company.

\n

Self-check

\n

Why can EV/EBITDA be more comparable between companies with different financing structures than the P/E ratio?

\n

In what type of companies is P/B usually more informative?

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