EV/EBITDA: what it means and how to read it

EV/EBITDA prices the whole business, debt included, against the operating profit it generates before financing and accounting charges. Because it counts debt in the price and ignores interest in the profit, it lets you compare a company funded by borrowing with one funded by equity, which the P/E cannot do fairly.

It is the multiple acquirers use, since a buyer takes on the debt along with the shares. It is most useful for capital-heavy industries such as telecom, cement, steel, power and hospitals, where depreciation is large and differs with the age of the assets.

Lower is cheaper, read against the same industry. As a rough guide, single digits are common for mature capital-heavy businesses and the teens or more for fast growers. It is not meaningful for banks, lenders and insurers, whose borrowings are the raw material of the business rather than a claim on it.