EBITDA/EV Multiple: Definition, Example, and Role in Earnings (2024)

FAQs

What is a good EV EBITDA multiple? ›

The EV/EBITDA Multiple

The enterprise-value-to-EBITDA ratio is calculated by dividing EV by EBITDA or earnings before interest, taxes, depreciation, and amortization. Typically, EV/EBITDA values below 10 are seen as healthy.

The EV/EBITDA ratio is calculated by dividing EV by EBITDA to achieve an earnings multiple that is more comprehensive than the P/E ratio. The EV/EBITDA ratio compares a company's enterprise value to its earnings before interest, taxes, depreciation, and amortization.

A high EV/EBITDA multiple implies that the company is potentially overvalued, with the reverse being true for a low EV/EBITDA multiple. Generally, the lower the EV-to-EBITDA ratio, the more attractive the company may be as a potential investment.

Earnings are key to valuation

The multiples vary by industry and could be in the range of three to six times EBITDA for a small to medium sized business, depending on market conditions. Many other factors can influence which multiple is used, including goodwill, intellectual property and the company's location.

What is a good Enterprise Value to Revenue Multiple benchmark? In general, a good EV/R Multiple is between 1x and 3x. However, public SaaS companies range between 6X and 12X EV/R.

For most businesses with EBITDA of $1,000,000 - $10,000,000, the EBITDA multiple will be in the general range of 4.0x to 6.5x, increasing as EBITDA increases. However, due to growth prospects, high tech and healthcare/biotech firms tend to earn EBITDA multiples for their industry above this average norm.

The enterprise value-to-revenue (EV/R) is easily calculated by taking the enterprise value of the company and dividing it by the company's revenue.

To calculate enterprise value, take current shareholder price — for a public company, that's market capitalization. Add outstanding debt and then subtract available cash. Enterprise value is often used to determine acquisition prices.

EV/EBITDA works better in case of service companies and where the gestation is too long. For example, capital intensive sectors like telecom and sunrise sectors like Fintech, Ecommerce can better use EV/EBITDA as a measure of valuation. The thumb rule is that a company with lower EV/EBITDA is more attractive.

A small business might use a multiplier between three and five. A large, public company typically uses a multiplier between seven and 12.

How do you calculate Ebita multiple? ›

Calculating the EV/EBIT multiple, or “enterprise value to EBIT”, comprises dividing the total value of the firm's operations (i.e. enterprise value) by the company's earnings before interest and taxes (EBIT).

What is a good EBITDA? An EBITDA over 10 is considered good. Over the last several years, the EBITDA has ranged between 11 and 14 for the S&P 500.

An EBITDA margin of 10% or more is typically considered good, as S&P 500-listed companies generally have higher EBITDA margins between 11% and 14%.

There are some national standards, depending on industry type and business size. Buyers, guided by appraisers and business valuation experts, use rules of thumb to value businesses based on multiples of business earnings. Bizbuysell says, nationally the average business sells for around 0.6 times its annual revenue.

EV to Sales Ratio is the valuation metric used to understand the company's total valuation compared to its sale. It is calculated by dividing the enterprise value (Current Market Cap + Debt + Minority Interest + preferred shares – cash) by its annual sales.

Revenue is a GAAP measure, while EBITDA is a non-GAAP measure. EBITDA multiples consider enterprise value and EBITDA, while revenue multiples calculate both the relationship between market cap and sales and the relationship between enterprise value and sales.

It takes into consideration growth and profit. In terms of interpreting the rule, 40% is the baseline figure where the company is deemed healthy and in good shape. If the percentage exceeds 40%, then the company is likely in a very favorable position for long-term growth and profitability.

Usually, a low EV/EBITDA ratio could mean that a stock is potentially undervalued while a high EV/EBITDA will mean a stock is possibly over-priced. In other words, the lower the EV/EBITDA, the more attractive the stock is. Generally, EV/EBITDA of less than 10 is considered healthy.

To employ EBITDA to value a business, look at other organizations in the same industry that have sold recently, and compare their selling prices to their EBITDA information. This yields a multiple of selling prices to EBITDA that can be used to arrive at a general estimate of what a company is worth.

How do you use equity value and enterprise value differently? ›

Both may be used in the valuation or sale of a business, but each offers a slightly different view. While enterprise value gives an accurate calculation of the overall current value of a business, similar to a balance sheet, equity value offers a snapshot of both current and potential future value.

Therefore EV/Earnings is an apples to oranges comparison and is considered inconsistent. Similarly Price/EBITDA is inconsistent because Price (or equity value) is dependent on capital structure (levered) while EBITDA is unlevered.

Company valuation approaches

When valuing a company as a going concern, there are three main valuation techniques used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions.

EV stands for Enterprise Value and is the numerator in the EV/EBITDA ratio. A firm's EV is equal to its equity value (or market capitalization) plus its debt (or financial commitments) less any cash (debt less cash is referred to as net debt).

Since EV/EBITDA is a valuation metric, lower enterprise multiple can be indicative of the company being undervalued. Usually, EV/EBITDA values below 10 are seen as desirable (undervalued).

EBITDA is net income (earnings) with interest, taxes, depreciation, and amortization added back. EBITDA can be used to track and compare the underlying profitability of companies regardless of their depreciation assumptions or financing choices.

EV-to-sales multiples are usually found to be between 1x and 3x. Generally, a lower EV/sales multiple will indicate that a company may be more attractive or undervalued in the market.

The most common multiple used in the valuation of stocks is the P/E multiple. It is used to compare a company's market value (price) with its earnings. A company with a price or market value that is high compared to its level of earnings has a high P/E multiple.

Charts of Earnings Multiples for Business Valuation

SDE multiples usually range from 1.0x to 4.0x. The range of EBITDA multiples (for EBITDA between $1,000,000 and $10,000,000) is 3.3x to 8x, with the averages ranging from 4.5x to 6.5x.

What is the rule of thumb for valuing a business? ›

60 to 70 percent of annual sales, including inventory. 1.3 to 2.5 times Seller's Discretionary Earnings (SDE), including inventory. Three to four times Earnings Before Interest and Taxes (EBIT) Two to four times Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

If the current owner is not paid a salary, then an appropriate market rate salary is deducted when calculating EBITDA. The same is true if the current owner or manager is underpaid. A market-rate salary for a manager or CEO is deducted to arrive at EBITDA.

EBITDA margin = EBITDA / Total Revenue

The margin can then be compared with another similar business in the same industry. An EBITDA margin of 10% or more is considered good.

EBITDA indicates the company's ability to make a consistent profit, while net income indicates a company's total earnings. Net income is generally used to identify the value of earnings for every share of the business.

A positive EBITDA means that the company is profitable at an operating level: it sells its products higher than they cost to make. At the opposite, a negative EBITDA means that the company is facing some operational difficulties or that it is poorly managed.

A “good” EBITDA margin varies by industry, but a 60% margin in most industries would be a good sign. If those margins were, say, 10%, it would indicate that the startups had profitability as well as cash flow problems.

The very basic and rough rule of thumb valuation for a company with around a million or more in earnings is a value of 5 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

But in general, a healthy profit margin for a small business tends to range anywhere between 7% to 10%. Keep in mind, though, that certain businesses may see lower margins, such as retail or food-related companies. That's because they tend to have higher overhead costs.

Using this basic formula, a company doing $1 million a year, making around $200,000 EBITDA, is worth between $600,000 and $1 million. Some people make it even more basic, and moderate profits earn a value of one times revenue: A business doing $1 million is worth $1 million.

How much income is considered a small business? ›

It defines small business by firm revenue (ranging from $1 million to over $40 million) and by employment (from 100 to over 1,500 employees). For example, according to the SBA definition, a roofing contractor is defined as a small business if it has annual revenues of $16.5 million or less.

In 2019, the median net worth of self-employed families was $380,000—over four times larger than the $90,000 in net worth held by the typical working family (Headd 2021).

Using EBITDA to Strike a Deal

Generally, the multiple used is about four to six times EBITDA. However, prospective buyers and investors will push for a lower valuation — for instance, by using an average of the company's EBITDA over the past few years as a base number.

The sales per share metric is calculated by dividing a company's 12-month sales by the number of outstanding shares. A low P/S ratio in comparison to peers could suggest some undervaluation. A high P/S ratio would suggest overvaluation.

When a stock is overvalued, it presents an opportunity to go “short” by selling its shares. When a stock is undervalued, it presents an opportunity to go “long” by buying its shares.

The higher the EBIT/EV multiple, the better for the investor as this indicates the company has low debt levels and higher amounts of cash. The EBIT/EV multiple allows investors to effectively compare earnings yields between companies with different debt levels and tax rates, among other things.

There are some national standards, depending on industry type and business size. Buyers, guided by appraisers and business valuation experts, use rules of thumb to value businesses based on multiples of business earnings. Bizbuysell says, nationally the average business sells for around 0.6 times its annual revenue.

EBITDA is a more accurate measure of profitability because it strips out the effects of a company's capital structure and tax situation. Additionally, EBITDA is more conservative because it is calculated before interest, taxes, depreciation, and amortization.