EV/EBITDA Ratio

The EV/EBITDA ratio compares a company's total value to its annual earnings before interest, taxes, depreciation, and amortization (EBITDA). Think of it as asking: "How many years of core operating profits would it take to pay for this company?" You'll see this ratio used constantly when comparing companies in the same industry, because it strips away accounting differences that can make direct comparisons messy. A lower ratio generally suggests a company might be cheaper relative to its earning power, while a higher ratio suggests investors are paying more per dollar of profit. For example, if TechCorp has an EV/EBITDA of 12 and CompetitorCo has 8, CompetitorCo looks like a better value—though that doesn't mean it's a better investment overall.