Which valuation multiple best excludes CapEx, Depreciation, and capital structure?

Which valuation multiple best excludes CapEx, Depreciation, and capital structure?

• A. EV/EBIT
• B. P/E
• C. EV/Sales
• D. EV/EBITDA

Answer: (D)

This multiple is designed to measure a company’s operating performance while stripping out factors that can obscure comparisons across firms. EBITDA represents earnings before interest, taxes, depreciation, and amortization, so it ignores non-cash charges (like D&A) and also isn’t tied to financing decisions. When you pair EBITDA with enterprise value (which reflects the total value of the firm including debt and cash), the resulting ratio focuses on operating profitability independent of capital structure and taxes. CapEx is a cash investment the company makes to maintain or grow its business, not an expense counted in EBITDA, and depreciation is a non-cash accounting charge that EBITDA already excludes. Because of this, the EV/EBITDA multiple tends to be less affected by how much a company spends on capital expenditures or by its financing mix, making it the clearest choice for isolating operating performance. Other options either still involve depreciation (EV/EBIT), tie to after-tax earnings (P/E), or reflect sales rather than profitability (EV/Sales), so they don’t cleanly exclude CapEx, D&A, and capital structure as effectively.

This multiple is designed to measure a company’s operating performance while stripping out factors that can obscure comparisons across firms. EBITDA represents earnings before interest, taxes, depreciation, and amortization, so it ignores non-cash charges (like D&A) and also isn’t tied to financing decisions. When you pair EBITDA with enterprise value (which reflects the total value of the firm including debt and cash), the resulting ratio focuses on operating profitability independent of capital structure and taxes.

CapEx is a cash investment the company makes to maintain or grow its business, not an expense counted in EBITDA, and depreciation is a non-cash accounting charge that EBITDA already excludes. Because of this, the EV/EBITDA multiple tends to be less affected by how much a company spends on capital expenditures or by its financing mix, making it the clearest choice for isolating operating performance.

Other options either still involve depreciation (EV/EBIT), tie to after-tax earnings (P/E), or reflect sales rather than profitability (EV/Sales), so they don’t cleanly exclude CapEx, D&A, and capital structure as effectively.