Lesson 7 of 10 · All lessons in this module
- Price multiples and the method of comparablesVideo lesson
- The relative valuation process
- Justified multiples: forecasted fundamentals, PEG and regression
- P/E in depth: earnings yield, PVGO and normalized earnings
- Sales, dividend, cash flow and industry-specific multiples
- Enterprise value multiples, asset-based valuation and choosing a modelVideo lesson
- EV/EBITDA drivers and value-to-book multiples
- Choosing a peer group: industry and factor approaches
- Current, past and forward multiples, and terminal values
- Integrated cases: why multiples differ, the justified P/E and comparables
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 7 of 10 · 14 min
EV/EBITDA drivers and value-to-book multiples
The justified EV/EBITDA rises with growth and falls with the cost of capital, capex and taxes; value-to-book multiples extend P/B to all capital providers; and when price-based and EV-based multiples disagree, cash, debt and non-operating income are usually why.
In short
- In EV, book debt is a common proxy for market debt, and cash is subtracted because it is a non-operating asset. Update EV for events since the last balance sheet.
- Justified EV/EBITDA = [(1 − t) + Dep × t/EBITDA − CapEx/EBITDA − WC investment/EBITDA] ÷ (WACC − g): higher with lower WACC, lower capex, higher g, lower taxes.
- EV/EBITDA suits capital-intensive firms and neutralizes D&A policy differences. Use EBITA if amortization is the big item, EBIT if neither D nor A is.
- Value to book = (MV equity + MV debt)/(BV equity + BV debt); EV to book subtracts cash from both. Justified: ROC × (1 − reinvestment rate)/(WACC − g). Use it when leverage differs or book equity is negative.
- Similar P/Es but very different EV/EBITDAs point to differences in cash, debt and operating versus net income.
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