The EV/EBITDA ratio is one of the most widely used valuation tools among professional investors. Unlike the P/E ratio, it is capital-structure neutral (ignores debt vs. equity) and ignores non-cash accounting charges (depreciation & amortisation). This makes it the go-to metric for comparing companies within the same industry, regardless of how they finance their operations.
Here is exactly how investors use this ratio to determine if a stock is expensive, fair, or cheap.
1. The "Rule of Thumb" Benchmarks
While there is no single "correct" number for the entire stock market, a generalised framework (used for mature, industrial, and manufacturing companies) is:
| EV/EBITDA Multiple | Typical Interpretation |
|---|---|
| Below 6x | Cheap / Undervalued – Often signals a distressed sector, cyclical trough, or a company facing structural headwinds. |
| 6x – 10x | Fair / Value territory – Common for mature, stable businesses with moderate growth. |
| 10x – 15x | Expensive / Growth priced in – Usually reserved for companies with strong competitive advantages (moats) or above-average growth. |
| Above 15x | Very Expensive / Speculative – Seen in high-growth tech, biotech, or pandemic-era bubble stocks (e.g., glove stocks hit 30x–40x in 2021). |
Warning: A low multiple (cheap) can be a "value trap" if earnings are about to crash. A high multiple (expensive) can be justified if earnings are set to explode.
2. The 4-Step Process Investors Actually Use
Investors never look at the EV/EBITDA number in isolation. Here is the step-by-step framework:
Step 1: Compare against Industry Peers (Sector Relative)
This is the most critical step. A 5.5x EV/EBITDA might be "expensive" for a utility company (which often trades at 4x-6x), but "extremely cheap" for a software company. For Kossan, investors would compare it directly to Top Glove, Hartalega, and Supermax. If their average is 12x and Kossan is at 5.5x, Kossan appears significantly undervalued relative to its peers.
Step 2: Compare against its own 5-Year Historical Average (Mean Reversion)
Investors check where the stock usually trades during a normal cycle.
Pre-pandemic (2017–2019), Malaysian glove makers routinely traded at 8x–12x EV/EBITDA.
During the pandemic boom, they hit 25x–40x.
During the post-pandemic crash, they fell to 4x–6x.
Since Kossan is currently at 5.5x, it is trading at the very bottom of its historical trough range. Value investors see this as cheap, provided the cycle is improving.
Step 3: Adjust for Growth Expectations (The "PEG" equivalent)
EV/EBITDA ignores future growth. Investors adjust the ratio by asking: "Is EBITDA growing or shrinking?"
If EBITDA is growing at +20% per year, a 10x multiple is cheap.
If EBITDA is shrinking at -10% per year, a 10x multiple is expensive.
Kossan's EBITDA in 1H26 grew significantly (due to recovery). A 5.5x multiple on growing earnings is exceptionally attractive. If Kossan's EBITDA were to double over the next 2 years, the forward EV/EBITDA would drop to ~2.75x, which is deeply undervalued.
Step 4: Adjust for Capital Expenditure (The "Capex Trap")
This is the biggest flaw of EBITDA. It adds back Depreciation, but Depreciation represents the wear-and-tear of factories. If a company needs to spend massive amounts on new machinery just to maintain current earnings, the EBITDA is misleading.
Kossan's 1H26 capex was RM 95.5 million, while Depreciation was RM 52 million. It is spending more than its depreciation. Investors will deduct this extra capex to get a clearer picture. If a company's maintenance capex is consistently higher than depreciation, a "cheap" 5.5x multiple suddenly becomes more expensive in real cash-flow terms.
3. Applying This Framework to Kossan (Current EV/EBITDA = 5.5x)
Verdict: Based on the data provided, professional investors would likely classify Kossan's current valuation as Cheap to Fair Value.
| Criteria | Assessment for Kossan |
|---|---|
| General Rule of Thumb | Cheap (Well below the 6x-10x fair zone). |
| vs. Glove Peers | Cheap (Peers likely trade higher during a recovery phase). |
| vs. Historical Avg (8x-12x) | Cheap (Trading at the trough of the cycle). |
| Growth Adjustment (1H26) | Very Cheap (EBITDA is growing strongly; a 5.5x multiple on a recovery cycle is highly attractive). |
| Capex Adjustment | Moderately Cheap (The heavy capex means real cash profits are lower than EBITDA suggests, but the massive RM 957m cash pile offsets this risk). |
4. The Ultimate Investor Takeaway
Investors use EV/EBITDA to quickly answer: "If I buy the whole company (debt + equity), how many years will it take for the pre-tax, pre-interest cash earnings to pay for the purchase price?"
At 5.5x, it would take ~5.5 years for Kossan's EBITDA to pay for the enterprise value.
At 8.0x (its historical average), it would take 8 years.
Because the glove industry is still in the early stages of recovery from a massive supply glut, a 5.5x multiple is pricing in pessimism—investors are worried that the current earnings recovery might stall.
If Kossan continues to deliver the strong operational improvements seen in 1H26, the market will likely re-rate the stock toward its historical 8x–10x EV/EBITDA range. At 8x, using Kossan's current annualised EBITDA, the implied Enterprise Value would be RM 2.83 billion (8 × RM 353.5m). Adding back its huge net cash (RM 918.5m), the implied market cap would be ~RM 3.75 billion, which is ~31% higher than today's RM 2.85 billion market cap.
In short: Based purely on this metric, Kossan looks fundamentally cheap, but investors are waiting for stronger confirmation that the industry oversupply is permanently resolved before paying a higher multiple.
Note: Topglove, Hartalega and Kossan are glove companies.
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