EBITDA Business Valuation Multiple – Definition

Cite this article as:"EBITDA Business Valuation Multiple – Definition," in The Business Professor, updated November 30, 2018, last accessed May 30, 2020, https://thebusinessprofessor.com/lesson/ebitda-business-multiple-explained/.

Back to: BUSINESS & PERSONAL FINANCE

EBITDA Business Valuation Multiple Definition

“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 firm’s 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 firm’s 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.

Reference for EBITDA Business Multiple

Academic Research on  EBITDA Business Valuation Multiple

●      Valuation using multiples. How do analysts reach their conclusions?, Fernandez, P. (2001). IESE Business School, 1-13. This paper focuses on equity valuation using multiples. The main aimof this paper is to show that PER, EBITDA and Profit after Tax (the most commonly used parameters for multiples) were more volatile than equity value. It also provide additional evidence of the analysts’ recommendations for Spanish companies.

●      Warning: Use of EBITDA may be dangerous to your career, King, A. M. (2001). Strategic Finance83(3), 35.

●      Valuation with Market Multiples: How to Avoid Pitfalls When Identifying and Using Comparable Companies1, Holthausen, R. W., & Zmijewski, M. E. (2012). Journal of Applied Corporate Finance24(3), 26-38. This paper explores an important section of the use of market multiples valuation process in selecting companies. In this paper, the authors examine the relevant value drivers for commonly used market multiples such as EBIT and EBITDA.They present all factors that should be taken into consideration when selecting companies for comparison. The authors also show that the degree to which different value drivers are important for assessing the comparability of companies differs across commonly used market multiples.

●      Valuation for mergers, buyouts and restructuring, Arzac, E. R. (2005). This paper explores the concept of the valuation for Mergers, Buyouts and Restructuring. It also discusses the theoretical underpinnings and the research evidence that justifies the recommended procedures.

 

●      Valuation multiples: A primer, Suozzo, P., Cooper, S., Sutherland, G., & Deng, Z. (2001). UBS Warburg: Valuation and Accounting (November). This document explains how to calculate and use multiples commonly used in equity analysis. In this paper, the authors discuss the differences between equity and enterprise multiples, show how target or ‘fair’ multiples can be derived from underlying value drivers and discuss the ways multiples can be used in valuation.

●      Multiples used to estimate corporate value, Lie, E., & Lie, H. J. (2002). Financial Analysts Journal58(2), 44-54. This paper evaluates various multiples practitioners use to estimate company value.

●      EBITDA: still crucial to credit analysis, Hamilton, B. (2003). Com. Lending Rev.18, 47.

●      Earnings, accruals, cash flows, and EBITDA for agribusiness firms, Omar Trejo-Pech, C., Weldon, R. N., & House, L. A. (2008). Agricultural Finance Review68(2), 301-319. This study examines empirical relationships of earnings, accruals, and cash flows for the U.S. food supply chain sector (i.e., agribusiness) and compares them with results for the complete U.S. market. It also explores earnings before interest, taxes, depreciation, and amortization (EBITDA) as a potential proxy for cash flow.

●      Ebitda/Ebit and cash flow based ICRs: a comparative approach in the agro-food system in Italy, Iotti, M., & Bonazzi, G. (2012). Financial Assets and Investing3(2), 19-31. This paper analyses the usefulness of the interest coverage ratios (ICRs) in firms. The article aims to evaluate whether there are significant differences in results using ICRs based on EBITDA or EBIT and ICRs based on different definitions of cash flow (CF). It further highlights the differences between both systems based on cash flow (CF).

●     An Entrepreneur’s Guide to Understanding the Cost of Venture Capital

●      , Anshuman, V. R., Martin, J., & Titman, S. (2012). Journal of Applied Corporate Finance24(3), 75-83. In this guide, the authors aim to tackle the problem of failure faced by entrepreneurs engaging in venture capital firms (VC) for the first time.

●      Accruals, Free Cash Flow and EBITDA for Agribusiness Firms, Trejo-Pech, C. O., Weldon, R., House, L., & Salas-Gutiérrez, T. (2006, July).

●      Accruals, Free Cash Flow and EBITDA for Agribusiness Firms. In Proceedings of the American Agricultural Economics Association Annual Meeting (pp. 23-26). This study explores the relationships between the accrual and cash flow components of earnings for agribusiness.

●      Beyond earnings: do EBITDA reporting and governance matter for market participants?, Cormier, D., Demaria, S., & Magnan, M. (2017). Managerial Finance43(2), 193-211. The purpose of this paper is to investigate whether formally disclosing an earnings before interests, taxes, depreciation, and amortization (EBITDA) number reduces the information asymmetry between managers and investors beyond the release of GAAP earnings. The paper also assess if EBITDA disclosure enhances the value relevance and the predictive ability of earnings.

Was this article helpful?