Having shared the problems of EBITDA previously, what does this mean for the commonly seen financial metric in the financial world today – The Enterprise Multiple (EV/EBITDA). Often, people say when you see the word EBITDA, you should substitute it with ‘bullshit earnings’. Does this mean that we should we just throw financial multiples associated with it out?

Comparing it against the P/E multiple, EV/EBITDA would definitely be a much better metric to be used. The reason being that with the P/E ratio, it has a numerator that is forward looking and a denominator that is based on past performance.

Why EV? By using Enterprise Value, it allows us to compare companies that are using different capital structures. Imagine buying two similar assets but financed in different ways. One through a pure equity method and the other through debt financing. At the end of the year, the ...