When investors talk about valuing companies, two numbers come up again and again — the P/E ratio and the EV/EBITDA multiple. They sound similar, and they both tell you how “expensive” a company’s earnings are. But under the hood, these two metrics look at profits from slightly different angles. Understanding that difference can help you see what investors are really paying for — and when the two numbers actually become almost the same thing.
What the P/E Ratio Really Measures
The Price-to-Earnings (P/E) ratio tells you how much investors are paying for each dollar of net income.It’s simple:
P/E = Market Cap ÷ Net IncomeIf a company earns $10 million in profit and has a market cap of $100 million, the P/E ratio is 10.That means investors are willing to pay $10 for every $1 the company earns after taxes, interest, and depreciation.The P/E ratio is clean and direct — it tells you what shareholders are paying for bottom-line profit. But that simplicity also hides some variables. Taxes, interest, and accounting choices can swing net income dramatically, even if the core business performance hasn’t changed much.
What the EBITDA Multiple Measures
The EV/EBITDA multiple takes a broader view.
It’s calculated as:
EV/EBITDA = Enterprise Value ÷ EBITDAEnterprise Value (EV) is the total value of a company’s operating business — market cap plus debt, minus cash.
EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization.
Because EBITDA strips out financing costs, taxes, and accounting depreciation, it’s often used to compare companies across different industries, tax rates, and capital structures.
Example:
If a company’s enterprise value is $150 million and its EBITDA is $15 million, the EV/EBITDA multiple is 10.
At first glance, that looks like the same “10×” you’d see in the P/E example — but the context is completely different. EBITDA measures operating earnings before the costs of debt, taxes, and capital wear and tear.
Why They Often Tell Different Stories
Imagine two companies:Company A has no debt, pays 25% in taxes, and owns few assets.Company B is heavily leveraged, pays lots of interest, and depreciates millions in equipment each year.Both could have the same EBITDA, but their net incomes — the “E” in the P/E ratio — could be vastly different.Company B’s P/E ratio might look sky-high because its net income is low after interest and depreciation, while its EV/EBITDA multiple could look low, suggesting the business is cheap on an operational basis.That’s why sophisticated investors use both numbers:
The P/E shows what shareholders earn after financing and tax realities.The EV/EBITDA shows how efficiently the business itself makes money before those financial and accounting choices.
When They Become Almost the Same Thing
Here’s the interesting part — if a company has no debt, no excess cash, and minimal depreciation or amortization, the two ratios can converge.
That’s because:
Enterprise Value ≈ Market Cap (no debt or cash)
EBITDA ≈ Net Income (no interest, low depreciation, steady taxes)
Under those conditions, EV/EBITDA and P/E practically measure the same thing.For example:
Let’s say a company has:
Market Cap: $100 million
No debt
EBITDA: $10 million
Net Income: $9 million
EV/EBITDA = 100 / 10 = 10×
P/E = 100 / 9 = 11.1×
They’re almost identical. The only gap comes from minor tax effects and depreciation.
The P/E ratio focuses on equity earnings after all expenses.The EV/EBITDA multiple focuses on operating performance before financial decisions and accounting noise.If you’re comparing companies with different debt levels, the EBITDA multiple usually gives a clearer view. But if you’re judging a company as a potential shareholder, the P/E tells you what kind of profit you’ll actually see at the end of the day.
And as a sharp observation points out — when there’s no debt, those two worlds collide.With no interest payments or financial leverage to separate them, the P/E ratio and the EV/EBITDA multiple tell almost the same story.
