Question of the day
2026-10-09
Why is EV/EBITDA often preferred over P/E for comparing companies?
Answer it out loud first — like you would in the room. Then check yourself:
Reveal the model answer
Model answer
EV/EBITDA is capital-structure and tax neutral and ignores D&A policy, so it allows cleaner comparison across companies with different leverage, tax rates and depreciation. P/E is affected by all of those, so two operationally identical firms can show very different P/Es.
⚠ Common wrong answer: "Because D&A is a fake non-cash expense that should just be ignored." Why it fails: D&A reflects real capex spread over time — assets genuinely wear out. The actual argument is comparability: EV/EBITDA strips out differences in leverage, tax, and depreciation POLICY, not the underlying cost of the assets.
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