EBITDA multiple (also known as enterprise multiple) is a ratio which measures the value of a company. It is mainly used by potential acquirers and it considers, as opposed to other indicators (such as, for example, price-to-earnings ratio), the company's debt. In this short article, you will find some information about EBITDA multiple and EBITDA multiple formula.
As we have already written above, EBITDA multiple measures the value of a company. The crucial point is that it includes the company's 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.
EBITDA multiple formula
To calculate EBITDA multiple, we need two elements:
- Enterprise value
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 Interests, Taxes, Depreciation and Amortization) - an indicator which measure 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 $
- EBITDA: 50,000 $
EBITDA Multiple in this case will be as follows:
EBITDA Multiple = 435,000 / 50,000 = 8.7
EBITDA Multiples by industry
The value of EBITDA Multiples can vary not only among individual companies but first of all depends on the industry. In high-growth branches, as high-tech industries, we can expect higher values than in slow-growth ones (for example in textile industry or railways).