Technical / Valuation
EV/EBITDA
Master the EV/EBITDA multiple: formula, interpretation, and why it's the go-to valuation metric in M&A and leveraged finance.
"Every time you hear 'EBITDA,' just substitute it with 'bullsh*t earnings.'" — Charlie Munger
Concept
EV/EBITDA measures how many times a company's operating cash flow you'd pay to acquire the entire business. It's a capital structure-neutral valuation multiple, meaning it compares what all investors (debt and equity holders together) would pay versus what the business generates before financing decisions and non-cash charges. The lower the multiple, the "cheaper" the company appears relative to its cash generation.
Intuition
Think of buying an apartment building. The purchase price isn't just the equity check you write—it includes assuming the mortgage. That total outlay is your "Enterprise Value." EBITDA is like the annual rent collected before paying the mortgage, property taxes, or accounting for roof depreciation. EV/EBITDA tells you: "I'm paying X years of rent to own this building." A 10x multiple means you're paying 10 years of operating cash flow. Whether that's cheap depends on growth, risk, and what comparable buildings trade for.
Components
Enterprise Value
What It Is
The theoretical takeover price of a company. EV captures the total claim on a business from all capital providers—equity holders, debt holders, preferred shareholders, and minority interest holders—netted against cash.
How to Calculate It
Interview Script
EV/EBITDA tells you how many years of operating cash flow you're paying to acquire the entire enterprise—both the equity and the debt. It's capital structure-neutral because you're comparing what all investors pay to acquire the business against what it generates before financing decisions and non-cash charges. A lower multiple suggests a "cheaper" valuation, but you need to benchmark against comparable companies and consider growth and risk profiles.