Enterprise Value and EV/EBITDA
Market cap prices the equity; enterprise value prices the whole business. Comparing companies with different debt loads requires the second one.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- Enterprise value is market capitalization plus net debt.
- It answers what acquiring the entire business would cost, debt included.
- EV/EBITDA compares businesses independently of how they are financed.
- The numerator and denominator must agree: EV pairs with pre-interest measures.
- It inherits every criticism of EBITDA.
MAD Academy Training Video · 0:46
What It Costs to Buy the Whole Thing
Enterprise value adds the debt you would inherit and subtracts the cash you would get, which is why it compares firms market cap cannot.
This lesson is part of a Stock Alerts + Tools plan.
The construction
enterprise value = market capitalization + total debt - cash and equivalents
- minority interests and preferred stock are added where they are material
The logic is an acquirer's. Buying every share gets the company and its debts, and the cash on the balance sheet comes with it and offsets part of the price. What is actually being paid for the business is the equity price plus the debt assumed, less the cash acquired.
The treatment of cash carries an assumption worth naming: that the cash is genuinely available. Cash held overseas against a tax charge, or required as regulatory capital, is on the balance sheet and is not freely deductible in the way this formula implies.
- Market capitalisationShares outstanding x price. The equity only
- + Total debtAn acquirer inherits it or repays it either way
- + Minority interest and preferredOther claims that come with the business
- - Cash and equivalentsComes back to the buyer on day one
- = Enterprise value
Why it changes conclusions
| Company A | Company B | |
|---|---|---|
| Market capitalization | $1,000m | $1,000m |
| Debt | $0m | $800m |
| Cash | $300m | $50m |
| Enterprise value | $700m | $1,750m |
| EBITDA | $100m | $100m |
| EV/EBITDA | 7.0x | 17.5x |
Identical market capitalizations and identical operating earnings, and one costs two and a half times as much to acquire. Market cap alone conceals that completely, and a P/E comparison between these two would be dominated by the interest expense rather than by anything operational.
Matching numerator to denominator
Enterprise value is a claim on the whole business, so it pairs only with measures computed before interest: EBITDA, EBIT, revenue, unlevered free cash flow. Pairing it with net income, which is after interest, double-counts the debt and is simply an error.
| Numerator | Valid denominators | Invalid |
|---|---|---|
| Enterprise value | EBITDA, EBIT, revenue, unlevered FCF | Net income, EPS, equity FCF |
| Market capitalization | Net income, EPS, equity FCF, book value | EBITDA, EBIT |
Where EV/EBITDA is standard
It is the default multiple in acquisition analysis and in credit work, because both are concerned with the whole capital structure rather than only the equity slice. It is also the sensible way to compare a leveraged operator against a debt-free one in the same industry.
It inherits every criticism of EBITDA, so it flatters capital-intensive businesses whose depreciation represents cash that must be spent again. EV/EBIT, which leaves depreciation in, is the stricter alternative for exactly those industries.
The details that change the number
The headline construction is market capitalisation plus debt less cash. Applied literally it produces a figure that is close enough for a screen and wrong for anything careful, because several other claims belong in it and some of the cash does not come out.
- Operating lease liabilities are debt in substance and now appear on the balance sheet, so excluding them understates the enterprise value of any retailer or airline.
- Pension deficits are a claim on future cash and are conventionally added, at least where the deficit is material.
- Minority interests belong in, because the consolidated EBITDA in the denominator includes the whole of a partly owned subsidiary.
- Not all cash is excess cash. A business needs some to operate, and cash held in jurisdictions that make repatriation expensive is not freely available.
The lease adjustment is the one that most often changes a conclusion. A retailer with modest reported debt and a large lease portfolio can have an enterprise value half again as large as the simple construction suggests, and its EV/EBITDA multiple correspondingly higher.
Because the adjustments involve judgement, two published enterprise values for the same company will differ. The practical response is to compute the figure the same way for every company in a comparison, rather than to search for the correct one.
The multiples that pair with enterprise value
The rule that governs every multiple is that the numerator and the denominator must belong to the same claimants. Enterprise value belongs to all providers of capital, so it pairs only with measures computed before payments to any of them.
| Multiple | Valid | Why |
|---|---|---|
| EV / EBITDA | Yes | EBITDA is before interest, so it belongs to everyone |
| EV / EBIT | Yes | Also pre-interest, and it does not ignore depreciation |
| EV / sales | Yes | Revenue is available to all claimants |
| EV / free cash flow | Only unlevered | Levered free cash flow is after interest, so it belongs to equity |
| EV / net income | No | Net income is after interest. A common and invisible error |
| Price / EBITDA | No | Price is equity only; EBITDA belongs to the whole capital structure |
The last two rows are the mismatches that occur most often, and they bias in a predictable direction: they make a heavily indebted company look cheaper than it is, because the debt appears in one half of the ratio and not the other.
EV/EBIT is underused relative to EV/EBITDA and is often the better of the two, because it keeps depreciation in and therefore does not assume the asset base maintains itself.