CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
Compared with the price-to-earnings ratio, an analyst is most likely to prefer EV/EBITDA when comparing companies that:
EV/EBITDA is most useful when comparing companies with significantly different capital structures. Enterprise value includes both debt and equity, and EBITDA is measured before interest expense, so the ratio is largely neutral to financing choices, unlike P/E, which reflects leverage through earnings after interest.
- Apay identical dividends
- Breport in the same currency
- Chave significantly different capital structuresCorrect
Explanation
Enterprise value captures both debt and equity claims, and EBITDA is measured before interest. The multiple is therefore less affected by leverage differences than P/E, which is based on earnings after interest. Dividend policy and reporting currency do not drive the preference.
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