The EBITDA multiple is a ratio that helps measure a company’s value. It is also called enterprise multiple. This ratio is mainly utilized by prospective acquirers and financial analysts. Unlike some other indicators, the EBITDA multiple considers the debt of the company. That makes a difference.
Whether you are a potential acquirer or financial economist, be sure to consider this metric when measuring the value of an enterprise or company. For that reason, you should know how to calculate EBITDA multiple. In this article, we will also cover everything you need to know about this ratio. So, keep reading to reveal the important facts about EBITDA multiple.
What Is EBITDA?
First things first, you need to know what EBITDA means. EBITDA stands for Earnings before Interest, Taxes, Depreciation, and Amortization. It is a measure of a company’s profitability that takes into account the company’s operating costs. It’s intended to gauge the company’s operating profit prior to depreciation and amortization as well as the deduction of interest and taxes.
EBITDA is often used by analysts to determine how much a company can afford to pay in dividends because it excludes taxes and other expenses. It is also used by investors when they want to estimate the amount of cash flow available to pay dividends or to repay debt.
This useful indicator enables us to estimate the company’s real capabilities. It also makes it easy to compare the profitability of different companies, providing that they don’t have the same financial strategy or tax system.
EBITDA is calculated by subtracting an entity’s interest expense, taxes, depreciation, and amortization expenses from its earnings before these items are calculated. When calculating EBITDA, the interest expense that was paid to the company’s creditors and the depreciation expense for assets that have been used in production are not deducted. In this case, EBITDA is calculated by subtracting these two items from earnings before taxes or net income.
What Is EBITDA Multiple?
Now that you know what EBITDA stands for, it is time to throw light on EBITDA multiple and see how it is used. So, what is it?
As stated earlier, the EBITDA multiple is aimed at measuring the net debt of a company. Thus, it allows us to judge and determine the company’s business performance as a whole. That can help us define whether a firm is overvalued or undervalued. This is of great importance for potential investors who use this ratio the most.
How Is It Used and Calculated?
In point of fact, the EBITDA multiple is a valuation ratio that is calculated by dividing the enterprise’s earnings before interest, taxes, depreciation, and amortization by its enterprise value. Actually, it is calculated by dividing the enterprise value of a company by its EBITDA.
It is used to measure a company’s profitability besides estimating its value. The EBITDA multiple can be used to evaluate the attractiveness of an investment opportunity or to compare companies in different sectors. This valuation ratio is used in many industries and can be applied to any type of company.
It is mainly used when the company being valued has not been operating for at least one year or when there are not enough comparable companies to make an accurate comparison. The EBITDA multiple is often used for stocks because it accounts for the fact that companies take on debt to grow.
If a company has a high EBITDA multiple and low debt, it may be able to take on more debt and still have room to grow. Let’s say a company with an EBITDA of $100 million and $10 million in debt has an EBITDA multiple of 10. If they had $100 million in debt, the ratio would be 100 – which would not be sustainable.
EBITDA Multiples & Different Industries
It is important to note that the EBITDA multiple values vary widely among different industries. For instance, high-tech industries and other industries in branches that feature a high growth tend to have higher values of EBITDA multiple. On the other hand, the values are lower when it comes to the industries in slow-growth branches like railways and the textile industry.
If you’re a private company or a startup interested in using the EBITDA multiple approach, then you need to apply the following multiples to your projections for the last year so that the result is discounted to today:
- Advanced Medical Equipment and Technology: 36,66
- Advertising and Marketing: 12,74
- Airport Operators and Services: 24,89
- Apparel and Accessories Retailers: 14,29
- Appliances, Housewares & Tools: 20,35
- Auto and Truck Manufacturers: 19,79
- Banks: 36,66
- Call Center Services: 17,28
- Cleaning Services: 17,28
- Consumer Lending: 19,57
- Health & Safety: 10,52
- Industrial Design Services: 17,28
- Casinos & Gaming: 30,70
- Computer & Electronics Retailers: 14,29
- Computer Hardware: 18,05
- Food Retail & Distribution: 9,59
- Life & Health Insurance: 8,59
- Office Equipment: 10,52
- Oil & Gas Drilling: 12,81
- Online E-commerce and Marketplace Services: 44,21
- Personal Services: 18,02
- Real Estate Services: 20,78
- Wireless Telecommunications Services: 6,95
These are only just some of the industries and the list can go on. These values are provided by the Equidam based on the 2021 EBITDA research. While these multiples by industry are a valuable benchmark, you should not take them as a given. It is always a good idea to do the research and use our calculator to get genuine outcomes.
Formula: How to Calculate EBITDA Multiple?
When calculating EBITDA multiple, you will need 2 elements: EBITDA and enterprise value. We will check the enterprise value first. It is calculated using the following formula:
Enterprise value = Market capitalization + Value of debt + Minority interest + Preferred shares – Cash and cash equivalents
Example:
- Cash and Cash Equivalents: $1,000
- Market Capitalization: $10,000
- Minority Interest: $100
- Preferred Shares: $10,000
- Value of Debt: $1,000
In this example, the enterprise value will be $20,100. Once you’ve calculated the enterprise value, you will need to gain information on EBITDA from the company report. Let’s say it is $53,000. If so, the EBITDA multiple is as follows:
EBITDA Multiple = Enterprise value / EBITDA
EBITDA Multiple = 20,100 / 53,000
EBITDA Multiple = 0.38
We recommend using our calculator to save time and make sure the result is correct. This tool will come in handy when calculating EBITDA multiple. It can make it easy to measure a company’s profitability and estimate its value. Try it out!