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The Money Maze TMM Nº 018

EV, EV/EBITDA and Price-to-Book Explained for JSE Investors

7 min

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EV, EV/EBITDA and price-to-book explained: what enterprise value includes, how to compare companies with different debt, and when P/B works best.

Show notes

Analyst reports can read like alphabet soup. EV, EV/EBITDA, P/B. But these are the tools that tell you the real price tag of a company, debt and all. Here’s the plain English version, with a little South African sarcasm to keep it spicy.

By The Money Maze | Listen to the episode: Spotify

The P/E ratio gets all the attention, but it has a blind spot: it ignores debt. Two companies can have the same P/E while one is debt-free and the other is drowning. Enterprise value and price-to-book help fill the gaps.

EV: enterprise value, not electric vehicle

No, EV isn’t about Teslas or tiny electric hatchbacks that barely make it to Pick n Pay and back. In investing, EV means enterprise value: the price tag of the whole business, including its debt.

The basic formula:

EV = market capitalisation + net debt

where net debt is interest-bearing borrowings minus cash. Analysts often also add preference shares and minority interests, because those are claims on the business too.

Why include debt? If you bought the whole company, you’d inherit its loans. Buying a house for R2 million with a R500,000 bond still attached means the real price is R2.5 million. EV is the house price including the bond.

A quick example

Two companies each have a market value of R10 billion.

  • Company A has R3 billion of cash and no debt. EV = R7 billion.
  • Company B has R5 billion of debt and no cash. EV = R15 billion.

Same market cap, very different real price tags. That’s why EV is the starting point in mergers and acquisitions.

EV/EBITDA: the popular kid at investment banks

EV on its own is just a number. To judge whether it’s expensive, compare it to earnings.

EV/EBITDA = enterprise value divided by EBITDA

EBITDA is earnings before interest, tax, depreciation and amortisation. It’s a rough measure of operating profit before financing choices, tax structures and accounting depreciation rules.

The ratio asks: how many years of operating profit would it take to “pay back” the full value of the business, debt included? It’s useful for comparing companies with different amounts of debt, because both EV and EBITDA ignore how the business is funded.

Back to our two companies

Say both Company A and Company B earn EBITDA of R1.5 billion a year. Company A’s EV/EBITDA is R7 billion divided by R1.5 billion, about 4.7 times. Company B’s is R15 billion divided by R1.5 billion, 10 times. On a P/E basis they might look similar, because their market values are the same. On EV/EBITDA, Company B is more than twice as expensive once you count the debt you’d be taking on. And Company B’s interest bill will also eat into the profits left for shareholders. Same braai, very different bill at the end.

The catch

Low EV/EBITDA can mean cheap. It can also mean the end-of-day boerie pack that smells funny when you get home. And EBITDA ignores real costs: a mine or telecom company has to keep spending on equipment, which EBITDA skips. Always check free cash flow too.

Don’t use EV/EBITDA for banks. Debt is their raw material, not a financing choice, so the concept breaks down.

Price-to-book: the accountant’s best friend

Book value is total assets minus total liabilities: shareholders’ equity. In theory, it’s what shareholders would get if the company sold everything at book value and paid off its debts.

P/B = share price divided by book value per share

  • Above 1: you’re paying more than net assets, usually for brand, growth or high returns.
  • Below 1: you’re paying less than net assets. Either a bargain, or the market doubts the assets are worth what the books say.

P/B works best for banks, insurers and property companies, where the balance sheet is mostly financial assets or property that gets valued regularly. Try it on a tech company and you’ll get nonsense. Office furniture isn’t where the value lies.

P/B and return on equity go together

For banks especially, P/B makes more sense next to return on equity (ROE). A bank earning a 20% ROE deserves a higher P/B than one earning 10%, because each rand of book value produces more profit. When you see a bank on a P/B below 1, ask whether its ROE is below its cost of capital. If it is, the discount may be fair.

When to use what

  • EV: the full cost of buying a business, debt included.
  • EV/EBITDA: comparing operating businesses with different debt and tax structures, such as industrials, telecoms and miners.
  • P/B: asset-heavy, balance-sheet businesses such as banks, insurers and property.
  • P/E: still useful, but check the debt.

Context is everything. A high EV/EBITDA can be justified for a fast grower. A low P/B can be a bargain or a warning. And always compare within the same industry.

Stokvel Starter Pack

  • Enterprise value: market cap plus net debt. The whole price tag.
  • Net debt: borrowings minus cash.
  • EBITDA: operating profit before interest, tax, depreciation and amortisation.
  • EV/EBITDA: years of operating profit to cover the whole price.
  • Book value: assets minus liabilities.
  • P/B: share price versus book value per share.

Takeaway: P/E tells you what you pay for profits. EV tells you what you’d pay for the whole business. P/B tells you what you pay for the net assets. Use the right tool for the right company.

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Sources

  1. EV/EBITDA, Corporate Finance Institute.
  2. Price to book ratio, Corporate Finance Institute.

This is not financial advice.

Transcript

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0:00 Welcome back to the Money Minister podcast for South African retail investors who want to stop feeling like they're drowning in jargon and start navigating the market like someone actually knows what they're doing. I'm your host, Jay, full of flu. And today we're looking at some of the grown up numbers that pop up in analyst reports and mergers and acquisition deals. Things like Evie Evie over EBITDA and price to book. These aren't just fancy tools for financial nerds or tailored suits.

0:30 They're practical, powerful ratios that tell you how companies really priced beyond the usual P/E smoke and mirrors. So let's start unpacking right. So when I say EV, I'm not talking about Tesla's or those tiny egos with enough range to get to the shops and back once. Evie stands for Enterprise Value, and if he is like checking the price of a car on Gumtree, then Evie is checking the price, including the balloon payment, overdue service and a dodgy loan your cousin took out on it for so many years. The formula EV equals market cap plus debt minus cash. Let's break that down.

1:13 Market cap is the value of a company shares. Debt includes long term borrowings and short term liabilities. Cash is deducted because, well, if a company has 10 billion in cash, that softens the blow a little, doesn't it? So if he tells you the true price tag, if you were to buy the whole business, debt and all, think of it as the price tag stuck to the company's forehead, not just the number you see on the Stock Exchange.

1:41 This is especially true or useful in mergers and acquisitions where you're not just buying shares, you're buying the whole beast, including all of its back. Now that you've got EV, what do you compare it to? Enter Evie over EBITDA, which sounds like something you'd shuttered, a Greek wedding, but it's actually a staple valuation ratio. So let's do a quick rewind.

2:07 EBITDA stands for earnings before interest, taxes, depreciation, and amortization. In plain English, it's the company's raw opening profit before the accountant start getting creative. Why use EBITDA? Because it strips out the financial structure, tax strategy, and depreciation schedules, which can vary wildly between companies, and gives you a clearer sense of operating performance, especially when you're comparing two companies that finance their businesses differently.

2:38 So Evie Ovid EBITDA is like asking how many years of Co operating earnings would it take to pay off the full value of the company including its debt if it keeps performing as it is. A lower Evie over EBITDA ratio typically signals a cheaper company. But don't get excited too quickly. Sometimes it's slow for a reason. Like that Puri pack on special at the end of the day might be cheap, but it's also starting to smell funny. Next up, we're looking at price to book or PB ratio. Now this one's a favourite in banking and property stocks circles because when a company owns a lot of tangible assets, buildings, equipment, even stock, the book value matters. So what's the book?

3:25 Book value is basically assets minus liabilities. This gives you the net asset value, or what shareholders would theoretically get if the company liquidated today, sold the laptop spite of the loans and split the leftovers. So price to book equals the share price divided by the book value per share. So if the PB is above one, you're paying more than the company's net assets, maybe because of brand value. Growth prospects all mocked optimism. Below one, you're buying the company for less than the value of it in its assets, which could be a bargain or a sign that something is deeply wrong.

4:06 Banks and insurers often trade close to book value because their assets and liabilities are very clear cut. But try using this for a tech stock like Meta or Naspers and you'll get nonsense because the real values in the brand user base algorithms, not the office finale. Chef B shines when you're valuing companies with solid measurable assets. Think mining property or insurance, not Netflix and chill.

4:34 So when should you use these more? EV over EBITDA is greater than comparing companies with different capital structures. It smooths out financing quirks and gets you closer to apples to apples. B helps when you're looking at asset heavy businesses and want to see how the market values they tangible assets. Evie gives you the truest sense of what the company costs, especially if it's carrying big debt or sitting on cash like a dragon on its hoard. But as always, context matters.

5:06 A high EV over EBITDA for a high growth company might be totally fine. A low PB ratio could signal value or disaster. An Evie on its own means very little unless you're comparing it to earnings, cash flow, or book value. Also, don't use EV over EBITDAR for banks. It doesn't make sense over there. Banks are funded by debt by design, so those ratios can get really messy.

5:34 Rather stick to PB and Roe when looking at financials. So let's wrap it up in your stockpile. Starter pack of stock lingo for this volume. 18 EV enterprise value and the real cost of buying a company, including its debt and minus its cash. EV over EBITDA, a cleaner valuation tool than P/E, showing how many years of operating profit it takes to pay off the full business.

6:02 PB or price to book. Grateful banks, property and asset heavy stocks below 1 might mean a bargain or a business on life support. These three valuation tools are essential if you want to start thinking like an analyst and not just a hopeful shareholder. And then, while my jokes may be more spreadsheet than stand up to, remember this is not financial advice. Do your own research and please speak to a licensed advisor. Catch you next time on the Money Maze.

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