What is the effect on EV/EBITDA if debt issued is spent on a value-generating capital project?

When debt is issued and spent on a value-generating capital project, the overall effect on the EV/EBITDA ratio typically results in an increase. This can be understood through the impact that cash flows from the project have on both the numerator and denominator of the EV/EBITDA ratio.

Initially, when debt is issued, the enterprise value (EV) increases due to the rise in total debt. If the capital project generates higher EBITDA by enhancing revenues or reducing costs, this leads to an increase in the earnings before interest, taxes, depreciation, and amortization. However, the interest expense incurred from the new debt does not directly factor into EBITDA since it is excluded from this calculation.

Now considering the two components of the ratio, while the numerator (enterprise value) increases due to taking on more debt, the denominator (EBITDA) also increases due to the operational improvements from the newly funded project. Depending on the magnitude of the increase in EBITDA relative to the increase in enterprise value, the ratio may experience different changes. However, if the project's returns are sufficient enough to greatly enhance EBITDA, it’s feasible for the EV/EBITDA ratio to increase.

Ultimately, the ratio’s increase indicates that the company is becoming more valuable