EV/EBITDA

EV/EBITDA answers the question of how many years of EBITDA a buyer pays when taking over the company as a whole — together with its liabilities. This is the view not of a shareholder but of an acquirer of the business: the acquirer pays the market price for the shares and additionally assumes the net debt, which is why the numerator holds the price of the enterprise rather than the price of a stake in it.

What the numerator is built from

The market value of the shares is taken as market capitalisation at current quotes, and net debt is added to it — borrowings less cash and cash equivalents. Then comes the part that makes two analysts arrive at different values for the same stock: it is customary to add to enterprise value the minority interests in subsidiaries, lease liabilities and debt-like liabilities such as pension deficits, and to subtract the value of non-core assets. The reverse breakdown of this construction is described by the bridge from EV to market capitalisation. The denominator holds EBITDA — earnings before interest, taxes, depreciation and amortisation, that is, a figure that the shareholder and the creditor see in the same way. It is precisely this matching that makes the ratio consistent: top and bottom both refer to the business as a whole.

How it looks on a real stock

The current value for Lukoil is 3,77. On its own it cannot be read: the multiple works only when set against the historical range of the same stock and against the sector median, because oil production, retail and telecoms operate at different levels of capital intensity and debt burden.

Where the metric lets you down

The main substitution is to treat EBITDA as an approximation of cash flow. It ignores capital expenditure, so a company forced to keep renewing its equipment looks cheaper on this ratio than a company with a light balance sheet and the same return; spending on development is better examined separately through growth capex. The second trap is mismatched dates: market capitalisation lives in today's quote, while net debt and EBITDA are taken from the latest financial statements, and at a turn in the cycle the ratio reflects the past, not the present; for commodity stories this is smoothed out by a cyclically adjusted multiple. The third is a direct comparison of the levels of EV/EBITDA and P/E with each other: these are scales with different denominators and different holders of the claim on income. Finally, a low value does not equal undervaluation — a business that is persistently cheap on multiples while its revenue is falling is described by the term value trap.