EV/EBITDA is often called the takeover multiple, because it reflects what it would really cost to buy a business outright. Enterprise value (EV) is the full price of taking over the whole company: its market value, plus the debt you would inherit, minus the cash you would get your hands on. EBITDA is a rough measure of the raw profit the business throws off from its operations, before the effects of financing, tax, and the accounting charge for wear and tear on its equipment. Put them together and a value of, say, 10 means it would take roughly ten years of that profit to earn back the purchase price.
As a rough guide, below 8 is usually attractive, 10 to 15 is fair for a steady business, and above 20 needs real growth to justify it.
Its big advantage over P/E is that it ignores how the company is financed, because it lumps debt and equity together into one price. That makes it the natural tool for comparing two companies that carry very different amounts of debt, and the standard yardstick in takeovers.
The catch is that EBITDA deliberately leaves out two real cash costs: spending on equipment and interest on debt. So for businesses that need a lot of expensive equipment, EV/EBITDA can flatter them, which is why it is worth checking against a cash-flow-based measure like EV/FCF.
A note on our number: we compute enterprise value as market cap plus debt plus preferred stock and minority (non-controlling) interest, minus cash. Those last two are easy to forget but real claims on the business, and they matter most for some banks, insurers, REITs, and conglomerates.