P/E is the first valuation multiple everyone learns. It also quietly ignores something large: debt. EV/EBITDA doesn’t — which is why two companies on a similar P/E can be valued very differently once you account for the whole business.
You don’t need to pick a favourite. You need to know what each one can and can’t see.
What P/E leaves out
The price-to-earnings ratio compares a company’s share price to its per-share profit. Multiply it out and it’s really the market value of the equity divided by earnings. That’s the catch: equity value ignores the balance sheet. A company loaded with debt and one with a pile of net cash can wear the exact same P/E while being very different investments.
Enterprise value: the whole business
Enterprise value (EV) is what it would cost to buy the entire company outright: market cap plus net debt (because you inherit the debt) minus cash (which you get back). It’s the price of the business itself, not just its equity slice.
Why the pairing with EBITDA works
EBITDA — earnings before interest, taxes, depreciation and amortization — is a rough proxy for operating cash generation, measured before the cost of debt. Pairing a debt-inclusive numerator (EV) with a pre-interest denominator (EBITDA) gives a multiple that’s neutral to how a company is financed — so you can compare a debt-heavy business and a debt-free one on the same footing.
P/E values the equity and ignores the mortgage. EV/EBITDA prices the whole house, debt included.
When the difference matters most
For a cash-rich, lightly indebted company, P/E and EV/EBITDA tell a similar story. The gap opens up for leveraged businesses — telecoms, utilities, capital-intensive industrials, anything bought with debt — where the balance sheet is a big part of the picture. One caution: the two numbers sit on different scales, so never compare a P/E of 12 to an EV/EBITDA of 8 as if lower automatically wins. Read each against its own peers.
Verizon’s ~12 P/E looks unremarkable, but a heavy debt load means the whole enterprise is valued at only about 7.6× operating earnings — leverage the equity-only P/E can’t see. The 6% dividend is the other side of that mature, cash-generative, debt-financed profile. Neither multiple is ‘the’ answer; together they show a business where the balance sheet is central to the story.
Educational commentary — not adviceBoth multiples are computed straight from the reported figures — the read just explains what each one is measuring, and why a levered name is exactly where they diverge. (Example reading — a point-in-time snapshot, not current data.)
Takeaways
- P/E values the equity only — it ignores debt and cash entirely.
- EV/EBITDA prices the whole business: market cap plus net debt, against pre-interest operating earnings.
- The gap widens for leveraged companies — telecoms, utilities, capital-heavy names.
- Don’t compare the two numbers directly — different scales; read each against its peers.
See both multiples on a stock you’re weighing
Pull up any company and get P/E and EV/EBITDA side by side, with a plain-language read of what the balance sheet is doing to the valuation.
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