EBITDA & The Multiple
The Hook
When someone says a company is worth ten times EBITDA, they have just told you almost everything about how the deal is priced. Learn what EBITDA is, why people multiply it, and where it quietly lies, and you can sanity check a valuation in your head while everyone else is still flipping pages.
Plain English
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. In plain terms, it is a rough picture of how much cash a company's core operations throw off before you account for how it is financed (interest), what it owes the government (taxes), and the slow accounting cost of its assets wearing out (depreciation and amortization). People love EBITDA because it lets you compare two businesses on their operations alone, stripping out things that depend on each company's debt load or tax situation. The multiple is the second half. To value a whole business, you take its EBITDA and multiply it by a number, the multiple, that reflects how much buyers will pay per dollar of earnings. A fast-growing, durable business earns a high multiple. A shaky, slow one earns a low multiple. Multiply EBITDA by the multiple and you get Enterprise Value (EV), the value of the entire business including its debt. The catch is that EBITDA ignores real costs. It pretends the equipment never needs replacing and the interest bill never comes due. That is exactly why it can mislead.
The Math
Two ideas do most of the work. First, build EBITDA from net income by adding back the four things the name promises: interest, taxes, depreciation, and amortization. Second, apply a multiple to get Enterprise Value. The multiple is set by the market: comparable companies and recent deals tell you what buyers pay per dollar of EBITDA for this kind of business.
- EBITDA = net income + interest + taxes + depreciation + amortization
- Enterprise Value (EV) = EBITDA x the multiple
- Implied multiple = Enterprise Value / EBITDA
A company reports net income of 4,000,000 dollars. To get to EBITDA, add back the four items the name lists. Interest expense was 1,000,000. Taxes were 1,500,000. Depreciation was 2,000,000 and amortization was 500,000. EBITDA = 4,000,000 + 1,000,000 + 1,500,000 + 2,000,000 + 500,000 = 9,000,000 dollars. Notice how much bigger EBITDA is than net income. That is not magic, it is just the four costs you stripped out. EBITDA is always going to look healthier than the bottom line, which is exactly why you treat it as a starting point, not the final word.
Take that same 9,000,000 dollars of EBITDA. Comparable businesses in this sector are changing hands at about 8 times EBITDA. Enterprise Value = EBITDA x the multiple = 9,000,000 x 8 = 72,000,000 dollars. Now suppose the business is growing faster and is more durable than its peers, so buyers are willing to pay 10 times instead. Enterprise Value = 9,000,000 x 10 = 90,000,000 dollars. The same earnings, valued two ways, are worth 18,000,000 dollars more simply because of the multiple. That is why the conversation in the room is so often about the multiple, not the EBITDA: a small change in the multiple moves the price enormously.
Two companies both report 9,000,000 dollars of EBITDA, so at first glance they look equally valuable. But Company A is a software firm that spends only 500,000 a year on equipment. Company B runs trucks and machinery and must spend 6,000,000 a year just to keep running. Subtract that real spending to get closer to actual cash. Company A keeps roughly 9,000,000 - 500,000 = 8,500,000. Company B keeps roughly 9,000,000 - 6,000,000 = 3,000,000. Identical EBITDA, but Company A generates almost three times the real cash. EBITDA hid that completely because it adds depreciation back and ignores the equipment bill. This is the single most important reason a sharp buyer never values a heavy-asset business on EBITDA alone.
The Lingo
- EBITDA
- Earnings Before Interest, Taxes, Depreciation, and Amortization. A rough measure of operating earnings before financing, tax, and asset costs.
- The multiple
- The number you multiply EBITDA by to value a business. It reflects how much buyers will pay per dollar of earnings.
- Enterprise Value (EV)
- The value of the whole business, including debt. EV = EBITDA x the multiple.
- Depreciation
- The accounting cost of physical assets wearing out over time. Added back in EBITDA, which is part of why EBITDA can flatter heavy-asset firms.
- Amortization
- The accounting cost of intangible assets, like patents or software, spread over their useful life. Also added back in EBITDA.
- CapEx (capital expenditures)
- Cash spent on equipment and assets to keep the business running. EBITDA ignores it, which is its biggest blind spot.
- Multiple expansion
- When buyers pay a higher multiple for the same earnings, often because growth or durability improved. It raises value without raising EBITDA.
Practice
In the Room
The Trap
Treating EBITDA as if it were cash. It is not. EBITDA adds back depreciation and ignores CapEx entirely, so it overstates how much money a heavy-asset business actually keeps. Two companies can post identical EBITDA while one quietly spends most of it on equipment just to stay alive. Before you trust an EBITDA-based valuation, ask one question: how much does this business have to spend on assets to keep running? The bigger that number, the less EBITDA tells you.
Quick Check
Q1.What does the D and the A in EBITDA stand for, and why does adding them back matter?
Q2.A business has EBITDA of 5,000,000 dollars and comparable companies trade at 7 times EBITDA. What is the implied Enterprise Value?
Q3.Net income is 3,000,000 dollars, interest is 800,000, taxes is 1,200,000, and depreciation plus amortization is 2,000,000. What is EBITDA?
Q4.Two companies both report 9,000,000 dollars of EBITDA. Company A spends 500,000 a year on equipment and Company B spends 6,000,000. Which keeps more real cash?
Q5.A model shows value rising because the company will sell later at 11 times EBITDA instead of 8, with no change in earnings. What is this called?
Practice Out Loud
An investor pitches you a trucking company at 8 times EBITDA and calls it a steal. In 60 seconds, explain why you want to see cash flow after CapEx before you agree, using a simple example. The AI will play the investor, who pushes back with: everyone in this sector is valued on EBITDA, why are you overcomplicating it?
Try it in real life
Pick a public company and calculate its EV to EBITDA. Then compare it to one competitor and notice the gap.
Wrap up this lesson
Submitting the Quick Check counts. Or mark it here when you feel ready.