What is the EV/EBITDA Ratio?
The EV/EBITDA ratio divides enterprise value by earnings before interest, taxes, depreciation, and amortization. A company with an EV of $10 billion and annual EBITDA of $2 billion trades at 5x EV/EBITDA. This multiple is the most commonly used valuation metric in mergers and acquisitions because it neutralizes differences in capital structure, tax jurisdictions, and depreciation policies, enabling direct comparisons across companies and countries.
Benchmarks Across Industries
Typical EV/EBITDA multiples vary significantly by sector. Software companies often trade at 15-25x due to high growth and recurring revenue, while industrial manufacturers trade at 8-12x, and mature utilities at 6-9x. In M&A transactions, acquirers typically pay a 20-40% premium over the trading multiple. A company trading at 10x EV/EBITDA might be acquired at 12-14x. Comparing a target's multiple to recent comparable transactions helps assess whether a deal price is reasonable.
Key Considerations
EBITDA is not a perfect proxy for cash flow. It ignores capital expenditure requirements, working capital changes, and the actual cash cost of taxes. A capital-intensive business with $500 million in EBITDA but $400 million in required annual capex generates far less distributable cash than its EBITDA suggests. For such companies, EV/FCF (enterprise value to free cash flow) provides a more accurate valuation picture. Always use EV/EBITDA alongside other metrics rather than in isolation.