Market Cap, Enterprise Value, and EV/EBITDA Explained With an Example
October 29, 2026
Market capitalization is the stock market's value of a company's equity: share price × shares outstanding. It tells you what it costs to buy all the shares, but not the cost of buying the whole business, because debt and cash also matter. Enterprise value (EV) adjusts for that: EV = market cap + debt − cash (and sometimes plus preferred stock and minority interests).
Example: 50 million shares at $40 give a market cap of $2,000 million. The company has $500 million of debt and $200 million of cash, so net debt is $300 million and EV = $2,000 + $500 − $200 = $2,300 million.
Skip the math and get your answer instantly:
Open the Investment Calculator →The EV/EBITDA Multiple
EBITDA (earnings before interest, taxes, depreciation, and amortization) approximates operating cash earnings before capital structure. If EBITDA is $230 million, EV/EBITDA = 2,300 ÷ 230 = 10.0. It means that, at the current price, an acquirer would pay 10 times annual EBITDA for the whole operating business. Net debt ÷ EBITDA = 300 ÷ 230 = 1.3 times, a measure of leverage; below 2 or 3 is often considered comfortable, though it varies by industry.
Because EV includes debt, the multiple allows comparison between companies with different capital structures, unlike the P/E ratio, which is affected by interest costs.
| Item | Amount ($ million) |
|---|---|
| Share price x shares (market cap) | 2,000 |
| Plus debt | 500 |
| Less cash | 200 |
| Enterprise value | 2,300 |
| EBITDA | 230 |
| EV/EBITDA | 10.0x |
| Net debt / EBITDA | 1.3x |
Why Two Companies With the Same Market Cap Differ
Company A has a market cap of $2,000 million and no debt, with $200 million of cash: EV = $1,800 million. Company B has the same market cap but $1,000 million of debt and $100 million of cash: EV = $2,900 million. If both earn the same EBITDA, B is much more expensive on an EV basis, and it carries more financial risk. The market cap alone hides this.
Typical Ranges and Uses
EV/EBITDA multiples differ by sector: software and healthcare often trade at 15 or more, industrials and consumer staples at 8 to 12, and utilities and telecoms at 6 to 9, though the market changes. Use it to compare with peers and the company's own history, in acquisitions (buyers often quote EV/EBITDA), and in valuations of private businesses. Make sure EBITDA is normalized for one-time items.
Limitations
EBITDA ignores capital expenditures, working capital changes, and taxes, so a company with heavy investment needs can look cheap on EV/EBITDA while generating little free cash flow. Cash may be trapped overseas or needed for operations. Always look at EV/EBIT, free cash flow, and growth along with it. This is educational, not investment advice.
Frequently Asked Questions
How do I calculate market cap?
Share price multiplied by shares outstanding.
What is enterprise value?
Market cap plus debt minus cash.
What does EV/EBITDA show?
How many years of EBITDA it would take to pay the whole business value.
Why use EV instead of market cap?
It accounts for debt and cash, so it enables fair comparisons.
What is a limitation of EBITDA?
It ignores capital spending, taxes, and working capital.