How to use Enterprise Value/EBIDTA ratio?

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.

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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.

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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.

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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).

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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.

Earnings Yield of the Enterprise

EBIT multiple  = EV / EBIT

Earnings Yield of the Enterprise (before tax)  EY = EBIT / EV

For example:
EY of A = 11.3%
EY of B = 15.3%

The EY of B at 15.3% is higher than the 11.3% of A, hence, B is a cheaper buy than A.

The EY computation is pre-tax EY and this is good enough for comparison among companies.  

For determining if you would like to invest in a stock, use after-tax EY so that you can compare with other alternative investments.


EY (after tax) = (EBIT x (1 - tax rate) / EV

For example:
EY (after tax) of A = 8.5%
EY (after tax) of B = 11.5%



Why is the earnings yield so important?

1.  It allows you to see how cheap a stock currently is.  Unlike a DCF analysis, calculating a stock's current earnings yield requires no estimates into the future.

2.  Using earnings yield as your main valuation tool to compare the relative price-value relationship of companies in the same industry, helps you to see which one is a better buy.. For individual cases, the investor should be happy to invest in a company with normal growth rate of 5% with an after-tax earnings yield of 12%.



How to use EV / EBIT?

1)  EV / EBIT as a primary tool to

• evaluate its earnings power and
• to compare it to other companies, 

in addition to the PE ratio.


2)  Joel Greenblatt uses for his Magic Formula the Earnings Yield of the enterprise, in conjunction with the Return on Invested Capital (ROIC).

3)  Buffett uses this when evaluating a business and has said that he will generally be willing to pay 7 x EV / EBIT for a good business that is growing 8% - 10% per year


4)  For cyclical plantation companies which have a lot of debts, it is more appropriate to use EBIT multiple and EV per hectare, rather than basing on PE ratio and market cap per hectare.


Summary

EBIT multiples (EV / EBIT) are better market valuation metrics than PE. 

However, both EBIT multiples and PE are all relative and comparative metrics.. 

It would be better if we can determine the absolute value of a stock, the intrinsic value. 

We can then compare the market price with the intrinsic value and determine the margin of safety to give us a better decision making in stock investment.



Reference::

Pages 251 - 252
The Complete VALUE INVESTING Guide that Works!  by K C Chong

Using Multiples

The use of multiples can increase valuations based on DCF analysis.

There are five requirements for making useful analyses of comparable multiples:

1. value multibusiness companies as a sum of their parts,
2. use forward estimates of earnings,
3. use the right multiple,
4. adjust the multiple for nonoperating items, and,
5. use the right peer group.

1.  Value Multibusinesses companies as a sum of their parts

Multibusiness companies' various lines of business typically have very different growth and ROIC expectations.

These firms should be valued as a sum of their parts.



2,  All Multples should use forward estimates of earnings

All multiples should be forward-looking rather than based on historical data, as valuation of firms is based on expectations of future cash flow generation.


3.  Use the Right Multiples

(a) Value-to-EBITA & P/E Multiples

The right multiple is often the value-to-EBITA ratio.

This measure is superior to the price-to-earnings (P/E) ratio because:

• capital structure affects P/E and 
• nonoperating gains and losses affect earnings.

(b) Alternative Multiples

Alternatives to the value-to-EBITA and P/E multiples include

• the value-to-EBIT ratio, 
• the value-to-EBITDA ratio, 
• the value-to-revenue ratio, 
• the price-to-earnings-growth (PEG) ratio, 
• multiples of invested capital, and 
• multiples of operating metrics.

4.  Adjust the multiples for nonoperating items

All of these ratios should be adjusted for the effects of nonoperating items.



5.  Use the right Peer Group

The peer group is important.

The peer group should consist of companies whose underlying characteristics (such as production methodology, distribution channels, and R&D) lead to similar growth and ROIC characteristics.

Enterprise Value Multiples

Enterprise value (EV) is calculated as the market value of the company's common stock plus the market value of outstanding preferred stock if any, plus the market value of debt, less cash and short term investment (cash equivalent).

EV
= market value of company's common stock
+ market value of outstanding preferred stock
+ market value of debt
- cash and short term investment (cash equivalent)

It can be thought of as the cost of taking over a company.



EV/EBITDA multiple

The most widely used EV multiple is the EV/EBITDA multiple.

EBITDA measures a company's income before payments to any providers of capital are made.

The EV/EBITDA multiple is often used when comparing two companies with different capital structures.


Loss-making companies usually have a positive EBITDA

Loss-making companies usually have a positive EBITDA, which allow analysts to use the EV/EBITDA multiple to value them.  

The P/E ratio is meaningless (negative) for a loss making company as its earnings are negative.