EBITDA Multiple

Created by Bogna Szyk
Last updated: Feb 15, 2022

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.

EBITDA multiple

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.

EBITDA multiple formula

To calculate EBITDA multiple, we need two elements:

  • Enterprise value
  • EBITDA

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).

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 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 article on what is time value of money quite helpful!

Bogna Szyk
Cash and cash equivalents
$
Market capitalization
$
Minority interest
$
Preferred shares
$
Value of debt
$
Enterprise value
$
EBITDA
$
EBITDA multiple
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