EV/EBITDA divides a company’s enterprise value (market cap plus total debt minus cash) by its EBITDA (earnings before interest, tax, depreciation, and amortisation). It values the whole company, not just the equity portion, against a profit measure that strips out financing and accounting differences between companies.
For example, a company with a market cap of RM800 million, RM300 million in debt, and RM100 million in cash has an enterprise value of RM1 billion. If its EBITDA is RM125 million, its EV/EBITDA ratio is 8.0.
This ratio is particularly useful when comparing companies within the same sector that carry different amounts of debt, since PE ratio alone can make a heavily indebted company look cheaper than it really is once that debt is accounted for.