EBITDA & EV/EBITDA Explained
Why analysts use EBITDA as a proxy for operating cash flow and how the multiple works.
What is EBITDA?
Earnings Before Interest, Taxes, Depreciation, and Amortization. By stripping out financing costs (interest), tax regimes, and non-cash charges (D&A), EBITDA approximates the operating cash generation of a business regardless of how it's financed or where it's domiciled. This makes it useful for cross-company comparison.
What is EV/EBITDA?
Enterprise Value divided by EBITDA. EV captures the total cost to acquire a business (market cap + debt − cash). Dividing by EBITDA gives you a multiple: how many years of current EBITDA you're paying. A 10x EV/EBITDA means you're paying 10 years of operating earnings.
Sector norms matter
Software companies might trade at 20–30x EBITDA; utilities at 8–10x; mature industrials at 6–8x. Always compare to sector peers — a 15x multiple is cheap for SaaS and expensive for a regional bank.