Which financial multiple is mentioned as relevant for evaluating a stock?

• A. EV/EBITDA
• B. P/E ratio
• C. Debt-to-equity
• D. Price-to-book

Answer: (A)

The main idea being tested is choosing a valuation multiple that lets you compare companies on a like-for-like basis regardless of how they’re financed or taxed. The EV/EBITDA multiple is the best fit here because it ties together enterprise value (which reflects debt, cash, and equity value) with EBITDA (earnings before interest, taxes, depreciation, and amortization), a proxy for operating cash flow.

EBITDA strips out depreciation and amortization, which can vary due to different asset bases and capex needs, and it excludes interest and taxes, which differ with financing and jurisdiction. By using enterprise value in the numerator, you account for a company’s overall capital structure, not just the equity portion. This makes EV/EBITDA particularly useful for comparing companies in capital-intensive industries or with different leverage levels.

In contrast, P/E relies on net income and is affected by tax rates and financing decisions; debt-to-equity is a balance-sheet ratio, not a valuation multiple; price-to-book bases value on assets and can be less meaningful for many modern companies. So for evaluating a stock across peers with varying capital structures, EV/EBITDA is the most informative choice.