EBITDA multiple is a financial metric used to evaluate a company's financial health and overall value. EBITDA multiples can vary significantly by industry, making it essential to understand industry-specific EBITDA multiples when evaluating companies in different industries.
EBITDA multiple is calculated using two metrics: EBITDA and Enterprise value (EV). EBITDA multiples, or also known as EV/EBITDA, are calculated by dividing a company's enterprise value by its EBITDA, the formula is as follows:
EBITDA multiple = EV / EBITDA
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is calulated like this:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortisation
Enterprise value (EV) is sometimes also referred as the total value of the company. Enterprise value (EV) is basically a modification of market capitalisation value adjusted for the company debts and cash.
EV = Market Capitalisation + Total Debt – Cash and Equivalents
EBITDA multiples are a useful tool for comparing companies in the same industry, evaluating a company's value, and making informed investment decisions. However, investors should be aware of the limitations of EBITDA multiples and consider other important factors when evaluating a business, such as a company's management team, competitive positioning, and market trends.
Here is a table showing EBITDA multiples by industries in the US as of Jun 2023:
| Industry | Average EBITDA Multiple | Number of companies |
|---|---|---|
| Advertising Agencies | 12.14 | 23 |
| Aerospace & Defense | 14.64 | 47 |
| Agricultural Inputs | 7.66 | 10 |
| Airlines | 10.9 | 13 |
| Apparel Manufacturing | 9.65 | 17 |
| Apparel Retail | 9.17 | 30 |
| Asset Management | 14.78 | 73 |
| Auto Parts | 10.49 | 41 |
| Auto & Truck Dealerships | 9.18 | 14 |
| Banks - Diversified | 8.42 | 5 |
| Banks - Regional | 8.59 | 282 |
| Beverages - Non-Alcoholic | 21.7 | 9 |
| Biotechnology | 11.29 | 553 |
| Broadcasting | 7.78 | 18 |
| Building Materials | 12.86 | 6 |
| Building Products & Equipment | 9.96 | 30 |
| Business Equipment & Supplies | 8.17 | 8 |
| Capital Markets | 13.52 | 29 |
| Chemicals | 7.41 | 17 |
| Communication Equipment | 16.21 | 52 |
| Computer Hardware | 18.83 | 25 |
| Conglomerates | 13.22 | 10 |
| Consulting Services | 15.19 | 16 |
| Consumer Electronics | 36 | 12 |
| Credit Services | 12.26 | 46 |
| Department Stores | 6.47 | 5 |
| Diagnostics & Research | 19.09 | 68 |
| Discount Stores | 14.82 | 9 |
| Drug Manufacturers - General | 13.43 | 11 |
| Drug Manufacturers - Specialty & Generic | 14.89 | 52 |
| Education & Training Services | 9.45 | 14 |
| Electrical Equipment & Parts | 12.68 | 39 |
| Electronic Components | 13.98 | 28 |
| Electronic Gaming & Multimedia | 22.57 | 9 |
| Electronics & Computer Distribution | 7.82 | 6 |
| Engineering & Construction | 12.65 | 34 |
| Entertainment | 14.6 | 37 |
| Farm & Heavy Construction Machinery | 11.69 | 21 |
| Farm Products | 8.26 | 15 |
| Financial Data & Stock Exchanges | 24.66 | 10 |
| Food Distribution | 11.14 | 10 |
| Footwear & Accessories | 10.84 | 11 |
| Furnishings, Fixtures & Appliances | 8.45 | 20 |
| Gambling | 9.6 | 11 |
| Gold | 15.94 | 14 |
| Grocery Stores | 11.42 | 10 |
| Healthcare Plans | 15.86 | 12 |
| Health Information Services | 25.14 | 33 |
| Home Improvement Retail | 11.21 | 7 |
| Household & Personal Products | 17.59 | 24 |
| Industrial Distribution | 14.43 | 16 |
| Information Technology Services | 16.24 | 49 |
| Insurance Brokers | 22.61 | 12 |
| Insurance - Diversified | 11.55 | 10 |
| Insurance - Life | 7.67 | 17 |
| Insurance - Property & Casualty | 13.77 | 38 |
| Insurance - Specialty | 9.58 | 15 |
| Integrated Freight & Logistics | 8.64 | 14 |
| Internet Content & Information | 20.2 | 32 |
| Internet Retail | 14.89 | 23 |
| Leisure | 11.25 | 28 |
| Lodging | 15.11 | 9 |
| Luxury Goods | 6.03 | 5 |
| Marine Shipping | 6.51 | 7 |
| Medical Care Facilities | 16.02 | 39 |
| Medical Devices | 17.6 | 105 |
| Medical Distribution | 12.47 | 7 |
| Medical Instruments & Supplies | 23.48 | 44 |
| Metal Fabrication | 9.24 | 12 |
| Mortgage Finance | 16.09 | 18 |
| Oil & Gas Drilling | 5.64 | 5 |
| Oil & Gas E&P | 3.78 | 67 |
| Oil & Gas Equipment & Services | 8.03 | 43 |
| Oil & Gas Integrated | 4.76 | 4 |
| Oil & Gas Midstream | 8.62 | 33 |
| Oil & Gas Refining & Marketing | 4.57 | 18 |
| Other Industrial Metals & Mining | 12.07 | 7 |
| Packaged Foods | 15.14 | 44 |
| Packaging & Containers | 10.54 | 22 |
| Paper & Paper Products | 6.51 | 5 |
| Personal Services | 13.68 | 13 |
| Publishing | 11.72 | 7 |
| Railroads | 12.78 | 9 |
| Real Estate - Development | 14.16 | 10 |
| Real Estate - Diversified | 11.45 | 4 |
| Real Estate Services | 10.2 | 21 |
| Recreational Vehicles | 8.01 | 16 |
| REIT - Diversified | 14.51 | 20 |
| REIT - Healthcare Facilities | 17.04 | 16 |
| REIT - Hotel & Motel | 10.28 | 16 |
| REIT - Industrial | 18.66 | 17 |
| REIT - Mortgage | 19.02 | 38 |
| REIT - Office | 12.95 | 24 |
| REIT - Residential | 16.95 | 18 |
| REIT - Retail | 15.66 | 23 |
| REIT - Specialty | 19.08 | 15 |
| Rental & Leasing Services | 7.35 | 20 |
| Residential Construction | 5.66 | 21 |
| Resorts & Casinos | 10.17 | 17 |
| Restaurants | 14.61 | 42 |
| Scientific & Technical Instruments | 25.54 | 23 |
| Security & Protection Services | 9.72 | 15 |
| Semiconductor Equipment & Materials | 14.06 | 24 |
| Semiconductors | 20.43 | 55 |
| Software - Application | 28.81 | 182 |
| Software - Infrastructure | 22.35 | 76 |
| Solar | 37.4 | 11 |
| Specialty Business Services | 10.61 | 28 |
| Specialty Chemicals | 11.69 | 48 |
| Specialty Industrial Machinery | 14.61 | 74 |
| Specialty Retail | 10.09 | 43 |
| Staffing & Employment Services | 9.36 | 23 |
| Steel | 6.51 | 15 |
| Telecom Services | 10.64 | 33 |
| Thermal Coal | 1.85 | 9 |
| Tobacco | 12.93 | 6 |
| Tools & Accessories | 12.8 | 11 |
| Travel Services | 14.87 | 12 |
| Trucking | 6.27 | 14 |
| Utilities - Diversified | 12.43 | 16 |
| Utilities - Regulated Electric | 11.69 | 25 |
| Utilities - Regulated Gas | 11.57 | 13 |
| Utilities - Regulated Water | 18.02 | 12 |
| Utilities - Renewable | 13.39 | 10 |
| Waste Management | 14.04 | 11 |
As shown in the table, the Solar industry has the highest average EBITDA multiple of 37.4x, followed by Consumer Electronics at 36x. In contrast, the Thermal Coal industry has the lowest average EBITDA multiple of 1.85x. These differences in EBITDA multiples highlight the importance of understanding industry-specific factors that affect a company's financial health and performance.
| Industry | Average EBITDA Multiple | Number of companies |
|---|---|---|
| Thermal Coal | 1.85 | 9 |
| Oil & Gas E&P | 3.78 | 67 |
| Oil & Gas Refining & Marketing | 4.57 | 18 |
| Oil & Gas Integrated | 4.76 | 4 |
| Oil & Gas Drilling | 5.64 | 5 |
| Residential Construction | 5.66 | 21 |
| Luxury Goods | 6.03 | 5 |
| Trucking | 6.27 | 14 |
| Department Stores | 6.47 | 5 |
| Marine Shipping | 6.51 | 7 |
| Industry | Average EBITDA Multiple | Number of companies |
|---|---|---|
| Solar | 37.4 | 11 |
| Consumer Electronics | 36 | 12 |
| Software - Application | 28.81 | 182 |
| Scientific & Technical Instruments | 25.54 | 23 |
| Health Information Services | 25.14 | 33 |
| Financial Data & Stock Exchanges | 24.66 | 10 |
| Medical Instruments & Supplies | 23.48 | 44 |
| Insurance Brokers | 22.61 | 12 |
| Electronic Gaming & Multimedia | 22.57 | 9 |
| Software - Infrastructure | 22.35 | 76 |
Several factors can influence EBITDA multiples, including:
Understanding these factors can help investors evaluate a company's EBITDA multiples accurately and make informed investment decisions.
EBITDA multiples are different across industries because of various factors that affect the company's financial health and performance that are specific to that industry. For instance, industries with high growth potential, high margins, and low levels of competition tend to have higher EBITDA multiples. On the other hand, industries with low growth potential, low margins, and high levels of competition tend to have lower EBITDA multiples. Some of the factors that affect EBITDA multiples across industries include:
Industries with high barriers to entry (commonly referred as business moats) tend to have high EBITDA multiples. This is because companies in these industries are perceived as protected from new competitors, which leads to higher profit margins and revenue growth rates.
Examples of industries with high barriers to entry include the healthcare, technology, airlines, telecommunications, and pharmaceutical industries. These industries have significant obstacles or costs for new entrants to establish themselves, such as extensive regulation, high capital requirements, strong intellectual property protection, and expertise required to develop and maintain innovative products or services. This makes it challenging for new companies to enter the market and compete with established players.
Industries that require significant capital expenditures tend to have low EBITDA multiples. This is because the high capital requirements lead to lower profit margins, which results in lower EBITDA multiples.
The oil and gas, manufacturing, utilities, construction, and transportation industries are examples of capital-intensive industries that require significant investments in physical assets such as machinery, equipment, and facilities. These investments can be a significant barrier to entry for new companies, as they require substantial capital and access to financing. Companies in these industries must make ongoing investments in order to remain competitive and maintain their operations.
Industries with high levels of competition tend to have lower EBITDA multiples. This is because companies in these industries face pressure to keep prices low, which results in lower profit margins and revenue growth rates.
The retail, food and beverage, hospitality, advertising and media, and transportation industries are examples of highly competitive industries with low EBITDA multiples. These industries have intense competition, resulting in lower profitability and valuations. Companies in these industries must focus on cost control, differentiation, and innovation to remain competitive and profitable. Investors tend to value companies in these industries based on factors beyond just EBITDA multiples, such as growth potential, market share, and management expertise.
EBITDA multiples have several advantages and limitations when used to asses a company value. EBITDA multiples are a popular method for valuing businesses due to their simplicity and ease of derivation from financial statements.
Using EBITDA multiples however has some limitations, such as not providing a direct value for the business and being subject to approximation based on peer metrics. Additionally, since EBITDA is not officially defined by accounting regulations, it is vulnerable to misrepresentation and carries a significant risk of error. Therefore, while EBITDA multiples offer a quick and easy way to determine value, investors must exercise caution and consider other factors when evaluating a business's true worth.
EBITDA multiples are useful for evaluating stocks or making portfolio decisions when there is comparability. Meaning we are comparing very similar businesses, with similar capital structure that operate in a similar way, such as in the case of income-producing properties with uniform comparable properties. However, it becomes difficult to use EBITDA to determine value for tangible and intangible assets that lack comparability. In rare situations, EBITDA can be used by making adjustments and comparisons. In most other situations, such as comparing two technology companies with different market demographics and consumer markets, making comparisons with EBITDA can be difficult.