EBITDA Business Valuation Multiple - Explained
What is EBITDA Business Valuation Multiple?
Written by Jason Gordon
Updated at October 11th, 2021
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What is EBITDA Business Valuation Multiple?
Valuation multiple refers to a ratio used to measure the value of firm. The EBITDA (Earnings before interest, tax, depreciation, and amortization) multiple specifically uses the company's EBITDA to arrive at the company's valuation. Following is the formula for calculating firms value: Enterprise multiple = Enterprise Value/EBITDA First, you will need to calculate the firm value. An enterprise value can be calculated by the following formula: (Market capitalization) + (total debts) + (minority interest) + (preferred shares) - (cash and cash equivalents). After measuring firms value, you can divide it by the company's EBITDA (Earnings before interest, tax, depreciation, and amortization). This will give you the EBITDA multiple. Investors use the EBITDA multiple method to know whether a firm shares are undervalued or overvalued. The ratio would indicate a firm financial position. A low ratio is an indication of undervaluation while higher ratio indicated overvaluation. This method is particularly useful in comparing transnational firms because it excludes all country-specific variables which may distort the real picture. An enterprise multiple varies from industry to industry. Generally, high-growth industries, such biotech, have higher enterprise multiples; whereas, slow growth industries have lower enterprise multiples.
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