Why would you use EV/EBITDA over P/E?

EV / EBITDA is generally a better metric than P/E because EBITDA is a proxy for operating cash flow. EBITDA is also:

  • Before interest, therefore capital structure neutral
  • Before taxes, therefore tax jurisdiction neutral
  • Before depreciation and amortization (D&A), therefore accounting policy neutral

On the other hand, P/E is driven by earnings. Earnings is an accounting number and can be influenced in many ways outside of the core business, such as through taxes, interest, and depreciation and amortization (D&A).