EBITDA multiple (also known as enterprise multiple) is a ratio that measures the value of a company. Potential acquirers mainly use it, and it considers the company's debt as opposed to other indicators (such as the price-to-earnings ratio, which is explained in our price earnings ratio calculator. In this short article, you will find some information about the EBITDA multiple and EBITDA multiple formula. Additionally, if this is the first time you are hearing of EBITDA you may check out our ebitda calculator for more information.
As we have already written above, EBITDA multiple measures the value of a company. The crucial point is that it includes the company's net debt, so it lets us see and judge the total business performance of a given company. It determines whether a company is undervalued or overvalued, so it is a very important ratio used by potential investors.
If you wish to learn more about how to calculate net debt, our Net debt calculator, will certainly satisfy your curiousity.
The EBITDA multiple formula
To calculate EBITDA multiple, we need two elements:
- Enterprise value; and
First of all, let's have a look at enterprise value. In simple words, it is a measure that shows us the market value of a company. Enterprise value can be calculated in the following way:
Enterprise value = Market capitalization + Value of debt + Minority interest + Preferred shares - Cash and cash equivalents.
Then, we need to divide it by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) - an indicator that measures the operating profit of a company.
To make it clear, let's write down the whole formula:
EBITDA Multiple = Enterprise value / EBITDA
Now, let's consider an example. Imagine a company with the following parameters:
- Enterprise value: 435,000 $; and
- EBITDA: 50,000 $.
EBITDA Multiple, in this case, will be as follows:
EBITDA Multiple = 435,000 / 50,000 = 8.7.
To explore enterprise further, visit our enterprise value calculator.
EBITDA Multiples by industry
The value of EBITDA Multiples can vary not only among individual companies but based on the industry. In high-growth branches, such as high-tech industries, we can expect higher values than in slow-growth ones (for example, in the textile industry or railways).
Another common multiple that uses enterprise value as a starting point is the Ev-sales multiple. It is very useful when the company is starting, and EBITDA is negative. On the other hand, when companies are profitable, you might also want to check its levered free cash flow or unlevered free cash flow to measure the free cash available to stockholders and debtholders.
If you're interested in finance topics such as this one, you will surely find our time value of money calculator quite helpful!