The Problem With P/E Ratios
P/E = Market Cap / Net Profit. Simple, widely quoted, easily understood. It is also easily manipulated.
Net profit is influenced by financing choices (debt vs equity), tax strategies, depreciation policies, and non-cash items. Two identical businesses with the same underlying earning power can show very different P/E ratios purely due to capital structure choices. This makes P/E ratios unreliable for cross-company comparison.
EV/EBITDA solves most of these problems.
Understanding EV/EBITDA
Enterprise Value (EV) = Market Cap + Total Debt − Cash
EV represents what it would cost to buy the entire business: you pay the equity (market cap), assume the debt, and get to keep the cash on the balance sheet.
EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortisation
EBITDA approximates operating cash generation before financing costs, taxes, and non-cash charges.
EV/EBITDA = What you pay for the whole business / What the business generates operationally
This is capital-structure neutral. Whether a company is financed with 20% debt or 60% debt, EV/EBITDA captures the operating performance consistently.
When to Use Each Multiple
Use P/E When:
- Financial companies (banks, NBFCs, insurance): For businesses where debt IS the product (banks borrow at low rates and lend at higher rates), enterprise value calculations are misleading. Net profit and ROE are the correct valuation framework.
- Asset-light, low-capex businesses (IT services, software products): For companies with minimal debt and low depreciation, P/E and EV/EBITDA give very similar answers. P/E is simpler.
- Consumer comparisons: When comparing consumer companies with similar business models and similar capex, P/E works fine.
Use EV/EBITDA When:
- Capital-intensive businesses (telecom, cement, steel, power, infrastructure): These have high depreciation charges that make net profit misleading. EBITDA strips these out for apples-to-apples comparison.
- Comparing companies with different debt levels: A cement company with ₹0 debt vs. ₹5,000 Cr debt will show very different P/Es at the same operating performance. EV/EBITDA neutralises this.
- M&A analysis: EV/EBITDA is the standard deal metric in mergers and acquisitions globally. It tells the acquirer what multiple of operating cash flow they are paying for the entire business.
Indian Sector Benchmarks (FY2025–26)
| Sector | Typical P/E Range | Typical EV/EBITDA Range |
|---|---|---|
| Private Banks | 12–22x P/B more relevant | N/A |
| IT Services | 22–35x | 15–25x |
| FMCG | 40–60x | 28–45x |
| Auto | 18–28x | 10–15x |
| Cement | 25–40x | 12–18x |
| Steel | 8–15x (cyclical) | 5–9x (cyclical) |
| Pharma | 22–35x | 15–22x |
| Infrastructure/EPC | 15–25x | 8–14x |
The EV/EBITDA Trap: Growth Must Justify the Multiple
A company trading at 20x EV/EBITDA in a sector where the average is 12x must justify that premium with a clearly superior growth profile, moat, or capital allocation track record. If you cannot articulate why this company deserves a 67% premium to peers, you are paying for hope.
The most common value trap in Indian markets: high-quality FMCG and consumer companies trading at 45–60x EV/EBITDA where future growth is already fully priced in. These companies can trade sideways for 3–5 years even while delivering perfectly good earnings growth - simply because the multiple compresses from 55x toward a more reasonable 35x.
Combining the Two: The EV/EBIT Approach
EV/EBIT (Earnings Before Interest and Taxes) is a compromise: it strips interest and tax effects (like EBITDA) but retains depreciation as a proxy for maintenance capex. For capital-intensive businesses where depreciation roughly equals maintenance capex, EV/EBIT is arguably the cleanest single valuation multiple.
Intrynsic's valuation screen shows all three multiples (P/E, EV/EBITDA, EV/EBIT) alongside FCF yield for every NSE stock, allowing you to choose the right lens for each business.