EV/EBITDA or another multiple: which valuation ratio to use?

2026-06-23 · By Lubin Danilo, founder of Lubin Investment

EV/EBITDA is the standard multiple in M&A and LBO. Our method prefers the free cash flow multiple because FCF is after real investments (capex) and debt interest, while EBITDA ignores them. For long-term stock-picking focused on cash generation quality, the FCF multiple is more precise and harder to manipulate accountically.

Definitions: EV/EBITDA and FCF multiple

EV/EBITDA (Enterprise Value / Earnings Before Interest, Taxes, Depreciation and Amortization) divides the total company value (market cap + net debt) by earnings before interest, taxes, and amortization. It is a "capital structure-neutral" multiple: it allows comparing companies with very different debt levels. The FCF multiple (Price / Free Cash Flow) divides the share price by free cash flow per share. It measures what you pay for each dollar of cash available after investments.

Why EBITDA hides the reality of cash

EBITDA has a fundamental flaw: it ignores capex (capital investments). A company with $100M EBITDA that invests $80M per year in plant maintenance generates only $20M of real cash. Its EV/EBITDA appears favorable, but its FCF multiple reveals the truth. Heavy industries (steel, mining, oil, utilities) often have low EV/EBITDA that seems attractive, but poor FCF once capex is deducted. Our methodology penalizes these sectors because they do not generate enough free cash for shareholders.

When to use EV/EBITDA

EV/EBITDA is legitimate in specific contexts: (1) LBOs (Leveraged Buy-Outs) where an acquirer buys a company with debt — it uses EBITDA to calculate debt repayment capacity; (2) cross-sector comparisons between companies with very different capital structures; (3) M&A transactions where the capital structure will be reorganized post-transaction. It is the tool of investment bankers, private equity funds, and arbitrageurs.

When our FCF method is superior

For long-term stock-picking focused on operational quality, our FCF multiple is more reliable for three reasons. First, it integrates real capex: a company that invests heavily is penalized, which is normal for a shareholder. Second, it is harder to manipulate accountically than EBITDA (companies can inflate EBITDA via recurring "extraordinary items," pro-forma adjustments, etc.). Third, it directly measures shareholder value: cash available for dividends, buybacks, or growth.

FAQ

Can EV/EBITDA and FCF multiple be combined in an analysis?

Yes, and it is often recommended. EV/EBITDA provides a "corporate" view useful for comparing operational valuation between sector peers. The FCF multiple gives the "shareholder" view on cash actually available. A company showing reasonable EV/EBITDA but a very high FCF multiple generally signals heavy capex or significant debt. Both together reveal more than either alone.

Why don't M&A bankers use the FCF multiple?

In an M&A context, the acquirer will often modify the target's capital structure (debt refinancing, operational synergies, asset restructuring). EBITDA offers a comparison base independent of these future changes. Moreover, M&A transactions often use 3-5 year projections, and EBITDA is easier to project than FCF which depends on future capex, less predictable.

Is the P/E ratio (Price/Earnings) better than the FCF multiple?

P/E (Price over net income) is even more imperfect than EV/EBITDA for our method. Net income is affected by amortization, exceptional charges, deferred taxes, stock-based compensation. It can be strongly negative in one year (accounting loss) while the company generates positive FCF. FCF is much more stable and resistant to annual accounting manipulations.

How do you concretely calculate an FCF multiple for a company?

Step 1: find FCF in the cash flow statement (operating cash flows minus capex). Step 2: divide the current market cap by annual FCF. Example: Apple, market cap $3,000B, annual FCF $110B = FCF multiple of 27x. For a more robust comparison, normalize over 3 years of FCF to avoid one-off effects. Our screener uses this normalization.

Does your method systematically exclude high-capex sectors?

Yes, structurally. Sectors with high capex relative to FCF (energy, utilities, construction, heavy industry) mechanically generate very high FCF multiples or negative FCF. Our FCF margin > 15% criterion therefore excludes them from our universe. This is not a value judgment on these sectors — they are simply business models incompatible with our criterion of free cash generation for shareholders.

Analyser une action sur Lubin Investment

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).