Because they provide different perspectives of analysis, the EV/EBITDA multiple and the P/E ratio can be used together to provide a fuller, more complete analysis of a company's financial health and prospects for future revenues and growth.
The EV/EBITDA Ratio
The EV/EBITDA ratio compares a company’s enterprise value to its earnings before interest, taxes, depreciation, and amortization. This metric is widely used as a valuation tool; it compares the company’s value, including debt and liabilities, to true cash earnings. Lower ratio values can indicate that a company is undervalued.
This ratio differs from the price-earnings ratio because it is not affected by any changes in capital structure. It allows analysts and investors to make more accurate comparisons of companies with differing capital structures.
This metric is also exclusive of non-cash expenses, such as amortization and depreciation. Investors are often less concerned with non-cash expenses and more focused on cash flow and available working capital.
The Price-Earnings Ratio
The P/E ratio is a ratio of market price per share to earnings per share (EPS). One of the most used and accepted valuation metrics, the P/E ratio provides investors with a comparison of the current per-share price of a company to the amount the company earns per share.
Ultimately, this metric is ideal for helping investors understand exactly what the market is willing to pay for the company’s earnings, and thus the market's overall consensus on the company's future prospects. Higher P/E ratio values generally indicate that the market expects share prices to continue to rise.
Higher P/E ratios are not always positive, however. High ratios may be the result of overly optimistic projections and corresponding overpricing of shares. Also, earnings figures are easy to manipulate, because this ratio takes non-cash items into consideration. Thus, it is often advisable to use this metric in conjunction with metrics such as EV/EBITDA to obtain a more complete and accurate assessment of a company.