EV/EBITDA vs. P/E: How to Match Numerators and Denominators (and Ace the Interview Question)

If you've ever been asked "Why do we use EV/EBITDA instead of EV/Net Income?" in an interview, you've met one of the most important ideas in valuation: the numerator and denominator of a multiple have to describe the same group of investors.

Get this right and a whole cluster of interview questions becomes easy. Get it wrong and you'll build comps that make cheap companies look expensive and expensive companies look cheap.

Let's break it down with real numbers.

The One Rule You Need to Remember

Every valuation multiple is a fraction: a value divided by a metric. The rule is simple:

If the value belongs to everyone, the metric must belong to everyone. If the value belongs only to shareholders, the metric must belong only to shareholders.

There are two "values" you'll use all the time:

• Enterprise Value (EV): the value of the core business to all capital providers, meaning debt holders, preferred holders, minority interest holders and common shareholders.
• Equity Value (market cap): the value that belongs only to common shareholders.

So the question for any metric is: who has a claim on it?

The Interest Line Test

Here's the fastest way to sort any metric. Look at where it sits relative to interest expense on the income statement.

Metrics BEFORE interest → pair with Enterprise Value

These figures haven't paid lenders yet, so the money is still available to everyone:

• Revenue → EV/Revenue
• EBITDA → EV/EBITDA
• EBIT → EV/EBIT
• Unlevered free cash flow → EV/UFCF

Metrics AFTER interest → pair with Equity Value

Lenders have already been paid, so whatever's left belongs to shareholders:

• Net income → P/E (or Equity Value/Net Income)
• EPS → Share price/EPS
• Levered free cash flow → Equity Value/LFCF
• Book value of equity → Price/Book
• Dividends → Dividend yield

That's it. If the interest line has already been subtracted, use equity value. If it hasn't, use enterprise value.

A Worked Example: Why Mismatches Break Your Comps

Imagine two companies with identical operations. Same revenue, same margins, same everything. The only difference is how they're financed.

Shared assumptions:

• EBITDA: $100
• D&A: $20
• EBIT: $80
• Tax rate: 25%
• Both trade at an enterprise value of $800
• No cash, no preferred, no minority interest (keeping it simple)

Company A has no debt. Company B has $400 of debt at a 5% interest rate, so $20 of interest expense.

Step 1: Work down to net income

Step 2: Work out equity value

Equity value = EV minus net debt.

• Company A: $800 - $0 = $800
• Company B: $800 - $400 = $400

Step 3: Calculate the correctly matched multiples

Notice what happened. EV/EBITDA is identical because it ignores capital structure, which is exactly what you want when comparing operating businesses.

P/E is different because Company B's shareholders are taking on more risk (they sit behind $400 of debt). That's not wrong. P/E is a valid multiple. It just reflects leverage, so you need to keep that in mind when comparing companies with very different balance sheets.

Step 4: Now watch what mismatching does

These numbers are garbage:

• EV/Net Income makes Company B look much more expensive, purely because it has debt. You're putting the debt holders' claim in the numerator while the denominator has already paid them off. You're double-penalizing.
• Equity Value/EBITDA makes Company B look like a bargain at 4.0x, because you've stripped the debt out of the numerator while the denominator still includes the cash flow that services it.

Two identical businesses, wildly different "valuations." That's why the matching rule matters.

How to Answer the Classic Interview Questions

"Why don't we use EV/Net Income?"

Keep it tight:

"Enterprise value represents all capital providers, but net income is only what's left for common shareholders after interest has been paid to lenders. The numerator and denominator represent different groups, so the multiple is inconsistent and gets distorted by leverage."

"Why is EV/EBITDA more popular than P/E for comparing companies?"

"EV/EBITDA is capital-structure neutral, so it lets you compare companies with different amounts of debt. It also isn't affected by differences in D&A policies or tax rates. P/E is influenced by leverage, interest rates and taxes, which can make companies with similar operations look very different."

Bonus points if you add that P/E is still widely used, especially for mature companies and by public equity investors, because it ties directly to what shareholders actually earn.

"Which multiple would you use for a bank?"

This one trips people up. For banks, debt is part of operations, not just financing. Interest is basically their cost of goods sold. That makes enterprise value hard to define in a meaningful way, so you'd typically use equity value multiples like P/E and Price/Book (or Price/Tangible Book).

The Advanced Stuff (Where Strong Candidates Stand Out)

Once you understand the core rule, you can explain why the enterprise value bridge looks the way it does. Every adjustment is about matching.

Why add noncontrolling (minority) interest to EV?

If a company owns, say, 70% of a subsidiary, accounting rules usually require it to consolidate 100% of that subsidiary's revenue and EBITDA. Since the denominator includes all of the subsidiary's EBITDA, the numerator has to include the value of the 30% the parent doesn't own. Adding noncontrolling interest fixes the mismatch.

Why subtract equity-method investments?

It's the reverse situation. If the company owns, say, 25% of another business, it typically records only its share of that business's net income, below EBITDA. Since that income isn't in EBITDA, the value of that stake shouldn't be in EV either. So you subtract it.

What about leases?

Under IFRS 16, most lease costs are moved out of operating expenses and into depreciation and interest, which increases EBITDA. To stay consistent, you should include lease liabilities in EV. If you're comparing companies on different accounting standards (US GAAP still treats operating lease costs as an operating expense), check that every comp is treated the same way. Some analysts sidestep this with EV/EBITDAR, which adds rent back to EBITDA.

The pattern is always the same: whatever is in the denominator decides what belongs in the numerator.

Quick Cheat Sheet

The Takeaway

You don't need to memorize a long list of "allowed" multiples. Just ask yourself one question every time: has the lender been paid yet?

If not, use enterprise value. If yes, use equity value. Walk through the two-company example above once on paper before your interview, and you'll be able to explain not just what the right answer is, but why the wrong answer breaks. That's the difference between reciting a definition and sounding like someone who's actually built comps.