When should you use EV/EBITDA as an alternative to P/E ratio? Here's a tip

EBITDA represents the earnings of the company before interest, depreciation and taxes. It just considers the operating profits of the company without even providing for capital replenishment

If you try to read the jargon that a lot of analysts write, you get to see the quintessential usage of terms like EV/EBITDA, SOTP etc. There has been a debate as to whether P/E is a good barometer of valuation or whether analysts need to look at other approaches to valuing companies. One such measure is the EV/EBITDA. Let us first break up the formula for simplicity.

Enterprise Value (EV) is the amount you will have to pay to acquire the company and can be effectively expressed as (Market cap + market value of debt – cash balances).

EBITDA,