Lesson A1.3 · 3 of 5 · Valuation
EV/EBITDA and other multiples: EV/Sales, P/B and P/FCF explained
EV/EBITDA compares the value of the whole business, debt included, with operating profit before depreciation and amortisation. It helps when companies carry different amounts of debt, but it ignores capital spending. So you set it beside EV/Sales, P/B and P/FCF, pick the multiple that suits the business and compare only within a sector, on the same date.
Terms in this lesson
- Enterprise value (EV)
- What it would cost to buy the whole company, debt included.
- EV/EBITDA
- The price of the whole business, debt included, compared with its operating profit.
- P/B
- The share price compared with the company's value on its balance sheet.
- Free cash flow yield
- How much spare cash the company makes in a year, compared with its stock market value.
What is enterprise value (EV) and how is it calculated
In the P/E lesson you compared the share price with shareholders’ earnings. Enterprise value (EV) answers a different question: what would the whole business cost, for shareholders and lenders together? It takes the same view as the DCF model, where company value comes from FCFF.
Definition
How is EV calculated?
EV = market capitalisation + borrowings - cash and liquid investments.
Where subsidiaries have minority shareholders, or the company has preference shares, you add those too. For Apple on 31 December 2025: market capitalisation on diluted shares is $271.86 × 14,743m = $4,008.12bn; borrowings are $90.51bn and cash plus marketable securities $144.80bn (balance sheet at 27 December 2025). EV = 4,008.12 + 90.51 - 144.80 = $3,953.84bn, a little below market value because Apple holds more cash than debt.
Apple, 31 December 2025. Our calculation.
The rest of this lesson is in the subscription
The subscription unlocks every chapter of Intermediate, Trading school, Investor psychology and Advanced, with their exercises and unlimited reviews.
Create a free accountEV/EBITDA and EV/Sales: the calculation and sector levels
The top and bottom of a multiple must belong to the same people. EV is the value for all providers of capital, so you divide it by a figure before interest: EBITDA (operating profit plus depreciation and amortisation) or sales. The share price you divide by shareholders’ figures: net profit, book equity, free cash flow after interest.
Columns showing EV/EBITDA for US sectors, from Damodaran’s January 2026 data: integrated oil and gas 8.16; steel 11.59; utilities 13.73; soft drinks 16.90; general retail 17.38; software 24.48; computers and peripherals (hardware) 25.42. A reference line marks the whole market excluding financials at 16.95.
| US sector | EV/EBITDA | EV/Sales | P/B |
|---|---|---|---|
| Computers/Peripherals | 25.42 | 6.63 | 34.08 |
| Software | 24.48 | 11.41 | 9.14 |
| Soft drinks | 16.90 | 4.16 | 6.87 |
| Utilities | 13.73 | 5.25 | 1.81 |
| Integrated oil and gas | 8.16 | 1.75 | 1.71 |
| Whole market, ex financials | 16.95 | 3.46 | 5.10 |
| Apple | 27.3 | 9.5 | 45.4 |
Damodaran, January 2026 data sets, US companies; EV/EBITDA for firms with positive EBITDA only. Apple: our calculation at 31 December 2025, on financial year 2025 sales and EBITDA and equity at 27 December 2025.
The gaps between sectors are wide and have reasons behind them: growth, margins, how much must be reinvested to grow. In the table, integrated oil and gas trades at an EV/EBITDA of 8.16 and computers and peripherals at 25.42. That is why you compare a multiple with its sector and its own history, as in the lesson on comparing a company with its sector, and always state the date of the data.
P/B and P/FCF: when to use each multiple
| Multiple | Formula | Most useful when |
|---|---|---|
| EV/EBITDA | EV ÷ EBITDA | comparing firms with different debt but similar investment needs |
| EV/Sales | EV ÷ revenue | firms with no profit yet or temporarily thin margins |
| P/B | market value ÷ book equity | banks, insurers, firms whose assets are carried close to market value |
| P/FCF | market value ÷ free cash flow | mature firms with steady capital spending |
The inverse of P/FCF is the free cash flow yield. For Apple on 31 December 2025: 4,008.12 ÷ $98.77bn (operating cash flow minus capex, financial year 2025) = 40.6, a yield of 2.5% a year.
Watch out
Why does Apple’s P/B of 45 tell you so little?
Book equity has shrunk through buybacks, not losses.
The ROE lesson showed that over the past ten years Apple has handed shareholders more through buybacks and dividends than it earned. Its $88.19bn of book equity is small next to the business, so P/B comes out at 45.4. Banks are the opposite: their assets are mostly loans and securities carried close to market value, so P/B becomes the main multiple. In his January 2026 data, Damodaran showed a P/B of 1.62 for large US money-centre banks and 1.14 for regional banks.
The traps in EBITDA and “adjusted EBITDA”
Quote
What did Warren Buffett write about EBITDA?
“References to EBITDA make us shudder - does management think the tooth fairy pays for capital expenditures?”
From the Berkshire Hathaway shareholder letter for 2000. The point: EBITDA adds back depreciation, but buildings, machines and data centres have to be replaced with real money. For a company that invests heavily, EBITDA looks far better than the cash left over. In the same letter Buffett writes that dividend yield, P/E, price to book and even growth rates have nothing to do with valuation except as clues to the amount and timing of cash flows.
Many companies also report “adjusted EBITDA”, stripping out costs they regard as unusual: restructuring, share-based pay, deal fees. The US regulator, the SEC, says a measure calculated differently from EBITDA should not be called “EBITDA” but something like “Adjusted EBITDA”, and must be reconciled to the accounting figures. It also says a measure that excludes normal, recurring cash operating expenses can be misleading.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: Aswath Damodaran (NYU Stern), January 2026 data sets for US companies: EV/EBITDA by sector (firms with positive EBITDA), EV/Sales and P/B by sector (Computers/Peripherals 25.42, 6.63 and 34.08; Software (System & Application) 24.48, 11.41, 9.14; Beverage (Soft) 16.90, 4.16, 6.87; Utility (General) 13.73, 5.25, 1.81; Oil/Gas (Integrated) 8.16, 1.75, 1.71; Steel 11.59; Retail (General) 17.38; Total Market (without financials) 16.95, 3.46, 5.10; Bank (Money Center) P/B 1.62; Banks (Regional) 1.14); Apple, Form 10-K for financial year 2025 (net sales $416,161m, operating income $133,050m, depreciation and amortisation $11,698m, operating cash flow $111,482m, capex $12,715m) and Form 10-Q for the quarter ended 27 December 2025 (borrowings, cash, shareholders’ equity $88,190m, shares); closing price on 31 December 2025: Yahoo Finance; Warren Buffett, Berkshire Hathaway shareholder letter for 2000; SEC, Compliance and Disclosure Interpretations: Non-GAAP Financial Measures (Questions 100.01, updated 13 December 2022, and 103.01).