Harbor Coffee and Ironvale Steel, our fictional coffee business and steelmaker, both need expensive equipment. In their latest years, Harbor spends $60 million on long-lived assets; Ironvale spends $200 million. Yet the steelmaker has the lower EV/EBITDA multiple. Does that make it a bargain?
The ratio prices each dollar of earnings before depreciation. It leaves the equipment bill for you to investigate.
Why EV belongs above EBITDA
Enterprise value, or EV, is the operating business's price tag, covering lenders and shareholders after allowing for cash. EBITDA means earnings before interest, taxes, depreciation, and amortization.
EV/EBITDA divides that business price by annual EBITDA.
For Harbor, $3,494.6 million ÷ $260 million gives 13.44, rounded. Read that as $13.44 of business value for every $1 of annual EBITDA.
EBITDA comes before interest payments to lenders. Its price tag must include lenders too. Using market capitalization alone would price only the shareholders' stake while counting earnings before lenders take their share.
Count the same claims on both sides of the fraction.
Two companies, two price tags
Each row uses the company's latest full year and its year-end EV: Harbor's FY3 or Ironvale's FY5. Both use the same EBITDA definition, without extra adjustments.
Amounts are USD millions from the fictional reports; EBITDA is reported, EV and multiples are calculated. The companies illustrate different business models, not valuation peers.
| Company | EV | EBITDA | EV/EBITDA |
|---|---|---|---|
| Harbor · FY3 | 3,494.6 | 260 | 13.44 |
| Ironvale · FY5 | 2,098.75 | 330 | 6.36 |
Ironvale's $2,098.75 million ÷ $330 million gives 6.36. A dollar of its EBITDA costs less than half as much as Harbor's.
The previous lesson doubled debt while keeping shareholders' market value fixed, so EV rose. Here, hold the operating business's value fixed instead: $3,494.6 million EV, $260 million EBITDA and $105.4 million cash. Change how much belongs to lenders.
Under Harbor's simple bridge, common-equity value = EV − debt + cash. Its $300 million debt leaves $3,300 million for shareholders. Suppose debt rises to $600 million. That extra $300 million leaves equity worth $3,000 million.
With business value fixed, every extra dollar of debt leaves one dollar less for shareholders. EV/EBITDA stays at 13.44. It is less directly affected by financing choices than P/E; debt risk and tax effects can still change the business's value.
High and low depend on the business
In Damodaran's January 2026 US data, sector EV/EBITDA was about 6 for Auto Parts, 14 for general utilities, and 24 for system/application software. These are aggregates for firms with positive EBITDA, not fair-value targets for individual companies.
High in one industry can be unremarkable in another. Within the same business model, faster sustainable growth, stronger profitability, and lower risk can support a higher multiple. Greater capital spending needed to deliver the same growth pulls the other way.
Compare annual historical EBITDA with annual historical EBITDA, or forecasts with forecasts. Check the definitions too: leases must be treated consistently in EV and EBITDA. The same label does not guarantee the same ingredients.
The spending EBITDA leaves out
Depreciation spreads past equipment spending across the years the assets are used. Adding that noncash charge back does not replace an aging furnace. The replacement still takes cash.
Harbor's capex, spending on long-lived assets, equals about 23% of its EBITDA: $60 million ÷ $260 million. Ironvale's $200 million ÷ $330 million is about 61%. Its capex bar stretches past half its EBITDA bar.
Total capex includes maintenance and growth. In these reports, both companies spend $20 million on growth; maintenance is $40 million at Harbor and $180 million at Ironvale. Maintenance preserves earning power; growth spending aims to earn more.
Subtract the total capex and Harbor has $200 million of EBITDA less capex ($260 − $60). Ironvale has $130 million ($330 − $200). Ironvale starts with more EBITDA and has less after capital spending.
EBITDA less capex is neither free cash flow nor distributable cash: it still omits cash taxes, interest, and working-capital changes, such as cash tied up in inventory.
You cannot call Ironvale a bargain just because 6.36 is below Harbor's 13.44. Its much heavier maintenance bill still needs funding. You need to know how much maintenance each business will require and what its growth spending will earn. A low multiple can reflect a costly business to keep running.
Other ratios and limits
Two optional cross-checks change what you divide by:
- EV/EBIT uses earnings before interest and taxes, after depreciation and amortization. It counts the depreciation expense, but still does not measure cash flow.
- EV/Sales uses revenue, before expenses. As with price-to-sales, its meaning depends on how much of each sales dollar becomes profit.
Changing the denominator changes what a low number tells you.
Even positive EBITDA can mislead: peak cyclical earnings can make the multiple look low just before earnings fall. Aggressive adjustments can also inflate EBITDA by removing costs the business keeps paying.
The next check is free cash flow yield: compare operating cash flow after capital spending with the price of the shareholders' stake.
In short
- EV/EBITDA prices each dollar of annual EBITDA for lenders and shareholders together.
- It makes different debt levels easier to compare without making debt risk disappear.
- Adding depreciation back does not pay for the next furnace. Check capital spending.
- A low multiple needs an explanation, starting with the business model and cash flow.