How to Answer “What’s the difference between EV/EBITDA and P/E, and when would you use each?” in Investment Banking Interviews
In investment banking interview prep, this is a common valuation question: “What’s the difference between EV/EBITDA and P/E, and when would you use each?” Interviewers ask it because the two multiples look similar on the surface but answer different questions and behave differently across capital structures, tax profiles, and accounting.
A strong answer explains (1) what each multiple measures, (2) what sits in the numerator and denominator, and (3) the practical situations where one is more comparable than the other—plus a quick caveat on capital structure and non-recurring items.
What Interviewers Look For in This Valuation Multiple Comparison
This investment banking interview question on valuation tests whether you understand the split between enterprise value (EV) and equity value, and how that flows into which performance metric you pair with each. Interviewers want to hear that EV/EBITDA is a pre-financing, operating-focused multiple, while P/E is an equity-holder multiple driven by leverage, interest, tax, and accounting choices.
They’re also assessing judgement: can you pick the right multiple for the business and the context (screening comps, sanity-checking a DCF, or discussing transaction pricing)? A good analyst-level response flags the key comparability issues—capital structure differences, negative earnings, different tax regimes, and one-offs.
Finally, they’re testing communication. The best answers are crisp: define each multiple, give 2–3 “use it when…” rules, and add one practical example and a couple of sanity checks.
EV/EBITDA vs P/E Interview Question: A Step-by-Step Answer Framework
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Step 1: Define each multiple (and what it values)
Start with one sentence each.
- EV/EBITDA compares the value of the whole business (EV = equity value + net debt + other claims) to an operating cash-flow proxy (EBITDA). It’s commonly used to compare companies regardless of financing.
- P/E compares equity value (price or market cap) to net income available to common shareholders. It’s an equity-holder multiple and bakes in leverage, interest expense, taxes, and below-the-line accounting.
Anchor the intuition: EV/EBITDA asks, “What do buyers pay for the operations?” P/E asks, “What do equity investors pay for the earnings left for shareholders?” This framing sets up the “when to use each” cleanly.
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Step 2: Explain the key drivers and comparability (capital structure, tax, accounting)
This is the core of the difference between EV EBITDA and P/E explained.
- Capital structure sensitivity: P/E changes materially with leverage because interest expense reduces net income; EV/EBITDA is less sensitive because EV includes debt and EBITDA is before interest.
- Taxes: Net income is after tax, so P/E is impacted by tax rates and NOLs; EBITDA is pre-tax, so EV/EBITDA tends to be cleaner across different tax profiles.
- Accounting and one-offs: Both can be distorted, but in different ways. EBITDA can be inflated by aggressive add-backs; net income is affected by D&A, impairments, and non-operating items.
A quick practical line helps: “EV/EBITDA is usually better for comparing operating performance across companies with different leverage; P/E is better when you care about what equity holders actually receive and the businesses have stable, meaningful earnings.”
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Step 3: State when you would use each (rules of thumb)
Give 2–3 clear decision rules—this is what interviewers are really after in how to use EV EBITDA and P/E.
Use EV/EBITDA when:
- You’re comparing companies with different leverage or different interest burdens.
- You want an operating multiple for comps/precedents where debt levels vary.
- Net income is noisy, depressed by D&A, or temporarily impacted by capital structure.
Use P/E when:
- You’re comparing equity returns for mature companies with stable accounting earnings.
- Capital structures are broadly similar (e.g., many large-cap sectors) and earnings quality is high.
- You’re speaking in “public market language” where equity investors anchor on EPS.
Add one caveat: if a company has negative net income, P/E is not meaningful; if EBITDA is negative, EV/EBITDA also breaks, and you may switch to revenue multiples or other metrics.
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Step 4: Add one concrete example + quick sanity checks
Close with a short example that shows you can apply the logic.
Example: two companies have identical EBITDA, but one is highly levered. Their EV/EBITDA could look similar because EV captures debt and EBITDA is pre-interest. But the levered company’s P/E will often look higher (or even meaningless if earnings are very low) because interest expense reduces net income.
Sanity checks to mention:
- Ensure numerator/denominator are consistent: EV with pre-debt metrics (EBITDA/EBIT), equity value with after-debt metrics (net income).
- Normalise for non-recurring items (restructuring, impairments) and be cautious with EBITDA add-backs.
- Check whether sector convention matters (e.g., banks often use P/E and P/B; many industrials lean on EV/EBITDA).
Sample Answer for EV/EBITDA vs P/E (Analyst Level)
EV/EBITDA is an enterprise multiple and P/E is an equity multiple. EV/EBITDA values the whole firm—equity plus net debt—relative to EBITDA, which is a pre-interest, pre-tax operating profit proxy. P/E values only the equity relative to net income, which is after interest, tax, and other below-the-line items.
Because of that, EV/EBITDA is generally better for comparing operating valuation across companies with different capital structures, since EV includes debt and EBITDA is before financing effects. It’s common in comps and precedent transactions when leverage varies, and it’s often more comparable across different tax situations because EBITDA is pre-tax.
P/E is best when you care about what’s left for common shareholders and earnings are stable and meaningful. It’s more sensitive to leverage and accounting items that flow through net income, so it can diverge a lot even if two companies have similar operations.
In terms of “when to use each”: if I’m comparing two industrial businesses where one has 4x net debt/EBITDA and the other is net cash, I’d lean on EV/EBITDA as the primary operating multiple and use P/E as a secondary check. If I’m looking at a mature, consistently profitable business with a fairly stable capital structure, P/E can be a clean way to discuss equity valuation. And if net income is negative, P/E isn’t meaningful, so I’d default to EV-based multiples or revenue, depending on the situation.
- Open with the enterprise vs equity distinction; it’s the fastest way to show you understand the numerator/denominator match.
- Call out capital structure sensitivity explicitly (leverage drives P/E more than EV/EBITDA).
- Mention “not meaningful if negative” for P/E (and that EV/EBITDA can also break if EBITDA is negative).
- Add one real-world use case (comps/precedents) to keep it practical.
- Keep EBITDA add-backs and normalisation as a brief caveat—don’t derail into accounting detail unless asked.
Common Mistakes in Investment Banking Technical Questions on Multiples
- Defining the formulas but not explaining the intuition (enterprise value vs equity value) or what the multiple is actually measuring.
- Saying EV/EBITDA is “capital structure neutral” without the nuance that EV and EBITDA can still be impacted indirectly (e.g., lease accounting, add-backs, cyclicality).
- Ignoring numerator/denominator consistency—mixing EV with net income or equity value with EBITDA.
- Not addressing loss-making companies: P/E can be meaningless with negative earnings, which changes which multiple you’d use.
- Forgetting practical context (comps vs precedents vs sector conventions) and giving an overly academic answer.
- Over-indexing on one-offs: going deep on adjustments instead of giving clear rules for when to use each multiple.
Follow-Ups to Expect in Valuation Metrics Interview Prep
Why do we use EV with EBITDA, but equity value with net income?
EV reflects all capital providers, so it pairs with pre-financing metrics like EBITDA/EBIT; net income belongs to equity holders after interest and taxes, so it pairs with equity value.
What are common adjustments you would make to EBITDA for EV/EBITDA comps?
Normalise for non-recurring operating items (restructuring, one-time legal, unusual gains/losses) and ensure add-backs are consistent across the peer set.
When would EV/EBITDA be misleading?
When EBITDA is a poor proxy for cash flow (high capex businesses, big working capital swings) or when EBITDA is heavily adjusted; in those cases EV/EBIT or EV/FCF may be better.
Why do banks and insurers rarely use EV/EBITDA?
Their debt is operational and integral to revenue generation, so EV and EBITDA aren’t defined the same way; P/E and P/B are more standard sector multiples.
If two companies have the same EV/EBITDA, can their P/E be very different? Why?
Yes—different leverage, interest rates, tax rates, and D&A levels can materially change net income even if enterprise valuation versus EBITDA looks similar.
How to Practise Explaining Multiples Clearly Under Time Pressure
- Practise a 45–60 second version that hits: definitions → capital structure impact → when to use each; then expand only if prompted.
- Drill the “consistency rule”: EV with pre-debt metrics; equity value with after-debt metrics—say it out loud until it’s automatic.
- Prepare one sector example (industrials/tech vs financials) and one “negative earnings” example for when to use EV/EBITDA vs P/E in interviews.
- In mock runs on AceTheRound, listen for filler and replace it with decision rules (“I’d use EV/EBITDA when…, P/E when…”).
- Time yourself to keep the model answer in ~2 minutes; interviewers reward clarity more than extra detail.
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