Lesson 5 of 6
EV to EBITDA, and what it leaves out
EV to EBITDA survives a difference in borrowing, which is its whole purpose. It is not a cash flow multiple, and two add-backs show why.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Enterprise value to EBITDA survives a difference in borrowing, because both terms sit before the effect of debt.
- EBITDA leaves out capital expenditure and the change in working capital entirely, not on purpose.
- Two companies at the same headline multiple can be priced at 14.3x and 26.7x once stock pay is left in and capex is taken out.
No EV to EBITDA is good on its own; the US median was 14.55x across 1,947 companies, built 2026-09-07 from prices last stored 2026-08-26. Enterprise value to EBITDA is built to survive a difference in capital structure, which price to earnings cannot: interest already shrank one company's earnings before the ratio is even taken.
The same headline multiple, two real prices
- Both companies, adjusted EBITDA as presented10.0x
- Company C, stock pay and capex taken out14.3x
- Company D, stock pay and capex taken out26.7x
What EBITDA leaves out
EBITDA is operating profit with depreciation and amortisation added back. It is not a line on any statement; every published figure was assembled by somebody. Interest and tax are excluded on purpose, so the multiple prices the business before the financing decision. Capital expenditure and the change in working capital are simply absent, not excluded on purpose. A business can grow its EBITDA every year and never generate a dollar an owner could take out.
What an add-back costs
ASC 718 (Accounting Standards Codification Topic 718, Compensation, Stock Compensation.) makes share-based pay an expense; because no cash leaves, the cash flow statement adds it back. Many adjusted EBITDA definitions add it back on the reasoning that it is non-cash. It is non-cash, and it is not free: the company issued shares, and existing holders own less of the same business.
Identical headline multiples. One company is priced at 14.3 times what is left after the two real costs, the other at 26.7 times. The headline figure ranked them equal.
The market's own distribution shows the pattern
Median EV to EBITDA by sector
- Energy · 143 companies9.41x
- Utilities · 71 companies13.33x
- Industrials · 373 companies15.58x
- Technology · 353 companies23.30x
Median, all US companies: 14.55x
Four of eleven sectors are shown. The two most capital-hungry sit below the market median and Technology well above it, as you would expect if the market discounts EBITDA that must be reinvested. Growth and the commodity cycle move these medians too.
Three numbers, all called EBITDA
| Version | What it is |
|---|---|
| Reader-built | Operating profit plus depreciation and amortisation, computed from the statements. |
| Company-adjusted | The company's own figure, with add-backs management chooses. |
| Vendor-recomputed | One definition applied to every company, so figures compare with each other rather than with any single company's presentation. |
No convention says which one a published multiple used. Regulation G requires a non-GAAP measure to be reconciled to the most directly comparable GAAP measure, which is why that reconciliation table is the most useful document for this multiple: it names every add-back and its amount.
Check yourself
Why does enterprise value to EBITDA survive a difference in how two identical companies are financed, while price to earnings does not?
- EBITDA is always higher than earnings
- Both the numerator and the denominator sit before the effect of debt
- Debt does not affect either ratio
Show the answer
Answer: B.
Enterprise value adds debt back into the price, and EBITDA is measured before interest, so financing differences wash out. Price to earnings has interest already inside the denominator and no debt in the price.What does EBITDA leave out that is not an intentional exclusion?
- Interest and tax
- Capital expenditure and the change in working capital
- Depreciation and amortisation
Show the answer
Answer: B.
Interest and tax are excluded on purpose so financing and jurisdiction do not distort the comparison. Capital spending and working capital are simply absent, which is why EBITDA is not a cash flow measure.Two companies show the same adjusted EBITDA multiple. What can make their real prices very different?
- Nothing, if the multiple is the same the price is the same
- How much of their EBITDA is stock pay added back and capital spending taken out
- Only their tax rate
Show the answer
Answer: B.
A company that adds back a large stock pay expense and spends heavily on capex can be priced far higher, once those two real costs are put back, than the headline multiple shows.Sources
- ASC 718, Compensation, Stock Compensation.
- Regulation G and Item 10(e) of Regulation S-K, on reconciling non-GAAP measures to GAAP.
- The EV to EBITDA distribution published on the open research pages of ValueScreener, built 2026-09-07.
What this leaves out
- The distribution was built 2026-09-07 from prices last stored 2026-08-26, and is rebuilt on a schedule.
- No level of EV to EBITDA is named as cheap.
- The worked examples use round invented numbers so the arithmetic can be checked.
- Nothing here is advice about any security.