EV/EBITDA Explained: Buy the Whole Business

Imagine you're buying the corner kirana shop down the road. The owner says, "Pay me ₹50 lakh and it's yours." You're about to shake hands — and then you notice the shop owes ₹30 lakh to its suppliers and the bank. That debt doesn't disappear when you sign. It becomes your debt. So the real price of owning that shop isn't ₹50 lakh. It's ₹80 lakh — the cheque you hand the owner plus the debt you inherit.

That, in one sentence, is the idea behind the number professional investors reach for before almost any other: enterprise value, and the multiple built on it, EV/EBITDA. Once you see a business the way an acquirer sees it — debt and all — you can't unsee it. Let me walk you through it the way I'd explain it across a table.

The price tag everyone quotes — and the one that's true

Most beginners start (and stop) with the P/E ratio — price-to-earnings, the share price divided by per-share profit, or equivalently the whole company's market value divided by its net profit. P/E answers a narrow question: for the equity, the shareholders' slice, how many years of profit am I paying? It's a fine starting point, and we cover the P/E ratio in full elsewhere. But it quietly ignores something a buyer of the whole business can never ignore: the debt.

Enterprise value (EV) fixes that. It's the total cost to buy the entire business outright — the market value of all the shares plus the debt you take on, because a new owner inherits the borrowings. The rough formula, the one you can compute yourself:

(Strictly, you also subtract the company's spare cash, since you'd get to keep it. We're leaving cash aside here to keep the arithmetic clean and the point intact.)

Pair that price tag with the right measure of what the business earns from operations, and you get the multiple. The earnings measure is EBITDA — earnings before interest, tax, depreciation and amortisation. In plain words: the cash the core operations throw off before you account for how the business is financed (interest), what it owes the government (tax), and the wear-and-tear write-down on its assets (depreciation). It's a rough stand-in for operating profit. So:

Watch the two price tags split apart

Numbers make this real. Take Adani Ports (APSEZ), India's largest commercial ports operator — it handled over 500 million tonnes of cargo in FY26, the first Indian transport operator to cross that mark. A port is the textbook capital-heavy, debt-carrying business — exactly where this lens earns its keep. (To be clear, this is a teaching example, not a buy or sell call on the stock.)

Here's the company through the two lenses (Inve data, 2026):

Look at the last two rows. On P/E, the business looks priced at nearly 32 times profit. On EV/EBITDA, about 21 times. Same company, same day — two different price tags. The gap isn't a rounding error or a trick. It is the debt and the financing costs, made visible. The ₹63,399 crore of borrowings raises the true purchase price (that's why EV is bigger than market cap), while EBITDA adds the interest, tax and depreciation back into the earnings. EV/EBITDA shows you the operating engine; P/E shows you what's left for shareholders after the engine pays its bills. An owner of the whole shop wants to see both — but starts with the engine.

Why professionals trust it: it doesn't care how the shop was paid for

Here's the property that makes EV/EBITDA the dealmaker's default. Picture two identical port operators, same berths, same cargo, same EBITDA. One funded itself entirely with shareholders' money; the other borrowed heavily. Their P/E ratios will look wildly different — the borrower's net profit is dragged down by interest, distorting the ratio. But their enterprise values will be close, and their EBITDA is identical, so their EV/EBITDA multiples line up. The metric is, in the trade's phrase, capital-structure neutral — it strips out the financing decision so you compare the businesses, not their balance-sheet choices. As one valuation primer puts it, "the EV/EBITDA multiple ... is thus widely used to benchmark companies of varying degrees of financial leverage." (Wall Street Prep.)

That's why it dominates mergers and acquisitions, leveraged buyouts, and any comparison across companies that carry different debt loads. When someone actually buys a whole company, they assume its debt — so they price it on what the whole thing costs and what the whole thing earns. They price it like you priced that kirana shop.

The blind spot: EBITDA pretends the shop never needs repairs

Now the honest part, the part a salesman would skip. EV/EBITDA has a hole in it, and for a business like a port it's a big one.

EBITDA adds back depreciation. But depreciation isn't an accounting fiction — it's the financial echo of a real, unavoidable fact: cranes rust, berths silt up, dredgers wear out, and every few years the company must spend hard cash to replace them. That spending is capex (capital expenditure), and EBITDA pretends it doesn't exist.

Buffett put it more sharply than I can. In his 2000 letter to shareholders he wrote: "References to EBITDA make us shudder — does management think the tooth fairy pays for capital expenditures?" (Berkshire Hathaway, 2000). In the same letter he adds that depreciation is a real cost "every bit as real as payroll or raw materials." His partner Charlie Munger was blunter still, telling investors to mentally swap "EBITDA" for "bullshit earnings" every time they saw the word (Storyboard18).

Watch how much the blind spot hides in our example. Adani Ports's company-reported FY26 EBITDA was about ₹22,851 crore (company release, 2026) — a shade above the ₹22,641 crore operating-profit figure we used in the table above (the two differ slightly because the company's reported EBITDA and the operating-profit measure Inve sums from the quarterly accounts draw the line in marginally different places; either way the picture is the same). Set that against FY26 capital expenditure of ₹15,320 crore (same release). Read those two numbers together: the business plowed back roughly two of every three EBITDA rupees into building and expanding its assets. Some of that ₹15,320 crore is replacement upkeep — the cranes and dredgers that wear out — but a large part is growth capex: the company's own release says FY26 capex came in above guidance precisely because of expansion. EV/EBITDA, looking only at the EBITDA line, never sees that ₹15,320 crore walk out the door, whether it goes to upkeep or to growth. The multiple makes a capex-hungry empire look cheaper than the cash actually available to its owners ever could.

EBITDA also ignores interest — and on ₹63,399 crore of debt, interest is not a footnote. The honest way to use EV/EBITDA is to pair it with the questions it can't answer: how much capex does this business swallow, and can its operating profit comfortably cover the interest? On the second, the cushion here looks sound — FY26 operating profit of ₹22,641 crore against ₹4,654 crore of interest is roughly five times cover (Inve data, 2026). The first question — capex — is the one the multiple will never raise on its own.

Read what management itself says about the debt

A ratio is a snapshot. The thing that actually moves enterprise value over years is whether management keeps borrowing sensibly and spending capex that earns its keep — and that intention shows up not in the ratio but in what they guide on the earnings call. APSEZ's management has guided to keep net-debt-to-EBITDA from breaching 2.5x and flagged FY27 capex of ₹12,000–14,000 crore (their own published figures). Those are the commitments an EV/EBITDA buyer must watch change over time — because rising debt or runaway capex quietly inflates EV and erodes the very cash the multiple omits.

Tracking that, call after call, across a whole portfolio, is the unglamorous work nobody has time for — which is exactly the job Inve's Promise Tracker does: it lines up what management guided against what actually happened, so you can see whether a debt or capex commitment held or quietly went silent. Read the guidance; don't just read the ratio.

Where this leaves a five-year owner

EV/EBITDA earns its place because it prices a business the way a buyer of the whole business must — debt included, financing decisions stripped out, operations laid bare. That's why bankers live by it. But it is a starting price, not a verdict. It is silent on the two things that decide whether a capital-heavy business actually enriches its owners: the cash it must pour back in as capex, and the interest it owes on its debt.

So use it as the professionals do — as the first question, not the last. A five-year owner of a port, a cement plant, a telco or any asset-heavy business shouldn't ask only "what's the EV/EBITDA?" They should ask the kirana-shop question that came before it: if I bought this whole thing today, debt and all, how much cash would actually be left for me after the cranes are replaced and the bank is paid? That leftover is free cash flow, and EBITDA won't tell you. The owner's arithmetic will.

Frequently asked questions