EV/EBITDA clarification

Question

Which of the following multiples is most useful when comparing companies with significant differences in capital structure?
A. EV/EBITDA
B. Price-to-book ratio
C. Price-to-cash flow ratio

A is correct. The EV/EBITDA approach is most useful when comparing companies with significant differences in capital structure. EBITDA is computed prior to payment to any of the company’s financial stakeholders and is not impacted by the amount of debt leverage.

I thought that the answer is C.
I did not pick A because EV has market value of debt in it so I thought that if they have large different in capital structure --> large differences in proportion of debt --> so not use EV/EBITDA........

can anybody explain the answer to me please?

vincentt · Answer

EV consists of more than just market value of debt. It also includes things like MV of common stocks, MV of preferred stocks and any other debts so basically it covers equity and debt.

vincentt · Answer

For example, 
Company A
current price: $20
book value (which is equity): $5 per share

Company B
current price: $20
book value: $10 per share

Company A would have a P/B ratio of 4x while company B would have a P/B ratio of 2x.

That's due to their differences in capital structure. So valuation multiples that doesn't specifically use equity or debt values would be the best to evaluate companies that very different capital structure.

Hope that make sense.