EV/EBITDA is a key ratio used in stock analysis to know if a company is overvalued or undervalued. It compares the company's overall value (including debt) to its earnings from core business activities. This helps investors judge whether the stock is priced fairly compared to others in the same industry. It removes the impact of tax and interest, giving a clearer picture of performance.

What Is EV/EBITDA Ratio in Simple Words?

EV/EBITDA stands for Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation, and Amortization. Enterprise Value (EV) includes a company’s market capitalisation, debt, and cash. EBITDA is a measure of a company’s operating performance. This ratio shows how many times investors are paying for the company’s operating profit.

It is widely used to compare companies across industries without worrying about their financial structure. It’s especially useful because it removes the effects of financing (interest), accounting decisions (depreciation), and tax environments, which differ from one company to another.

Why Is EV/EBITDA Preferred Over Other Ratios?

Many investors and analysts prefer EV/EBITDA over ratios like P/E (Price to Earnings) because it gives a better view of a company's performance. The P/E ratio is affected by taxes and financing decisions, which vary across countries and companies. But EV/EBITDA focuses only on operating profits and the true cost of the company, including its debt.

This makes it ideal for comparing companies in capital-heavy sectors like manufacturing, telecom, and infrastructure, where depreciation is large. It gives a clearer picture of how the business is doing before accounting tricks or financial decisions change the numbers.

What Does a High or Low EV/EBITDA Mean?

A high EV/EBITDA means investors are paying more for each rupee of the company's operating profit. It can mean the company is overvalued, or investors expect strong future growth. A low EV/EBITDA may indicate undervaluation or poor market sentiment. But it can also be a hidden opportunity if the company has strong fundamentals.

In general, a ratio between 6 to 10 is considered reasonable in most industries. Very high numbers may mean the stock is expensive, while very low numbers might show undervaluation—but always check why before investing.

How Is EV/EBITDA Used in Real-World Investing?

Investors use EV/EBITDA to find stocks that are undervalued compared to their earnings. For example, if Company A and Company B are in the same sector, but Company A has a much lower EV/EBITDA, it might be a better value. This ratio is also popular during mergers and acquisitions. Buyers want to know how much they are paying for the real earning capacity of the company.

Fund managers and institutional investors use it to screen stocks before digging deeper into financial reports. Even retail investors can use it to make better decisions with less risk.

What Are the Limitations of EV/EBITDA?

While EV/EBITDA is very useful, it also has some limits. It doesn’t include capital expenses, so companies that need to spend heavily on equipment may look better than they actually are. It can also hide problems if the company’s EBITDA is strong today but dropping in the future. Also, it’s best used when comparing similar companies. Using it to compare companies from different industries can be misleading. Always combine this ratio with others like P/E, ROE, and debt-to-equity to get a full view of a company’s health.

How Can Indian Investors Use EV/EBITDA?

For Indian investors, EV/EBITDA is a smart way to compare companies across sectors like IT, pharma, banking, and FMCG. You can use platforms like Angel One, Moneycontrol, or Screener to check EV/EBITDA values. Always compare it with industry average. A company with consistently low EV/EBITDA and strong growth can be a good opportunity. But don’t rely only on this ratio. Also look at profit growth, debt, and management quality before investing. This simple tool, when used correctly, can help you find strong stocks at better prices.