EBITDA Multiples By Industry: An Analysis

One of the most common metrics for business valuation is EBITDA multiples. Using these multiples, appraisers can compare a subject company’s performance and value against similar companies. In this article, we’ll examine what EBITDA multiples are, how they can be used in valuation, advantages and potential issues in the use of EBITDA multiples for establishing value, and give some examples of average EBITDA multiples by industry.

EBITDA Multiples: What are they?

EBITDA is an acronym that stands for earnings before interest, tax, depreciation, and amortization. EBITDA is an indicator that is often used by investors or prospective buyers to measure a business’ financial performance. (Tweet this!)

The formula for calculating EBITDA is straightforward:

Operating profit + Depreciation + Amortization = EBITDA

This formula eliminates the non-operating effects unique to each business. By focusing on profitability before depreciation and amortization (which might vary significantly across industries) as the measure of business performance, EBITDA allows comparisons of companies across different industries and tax brackets.

The application of multiples to EBITDA values allows comparison of companies of varying sizes across various industries. Typically, industries with higher potential for future growth will have higher multiple values, and larger, more established companies will have higher multiples than smaller ones. The level of EBITDA itself will also play a role in assigning multiples. This variance allows potential risk versus return to be taken into consideration; generally, large companies or those with higher profitability pose less risk. This will be reflected in the EBITDA multiple used to calculate value.

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Advantages & Disadvantages Of Using EBITDA Multiples For Valuation

The primary reason EBITDA multiples are used for valuation is that they are easy to derive from financial statements. To establish operating income before depreciation and amortization and enterprise value, the value of the business can be calculated by looking up the sum of its stock market value, its outstanding debt and its cash on the balance sheet and dividing it by EBITDA to determine the multiple. It is a much quicker and easier way to determine value than performing a cost or income analysis to calculate value.

The downside is that EBITDA does not by itself give a direct value for the business; it is simply an approximation to allow estimation of value, through comparison to metrics for peer companies. As such, it is subject to the same limitations as the use of the market approach for determining value. The primary limitation to the use of EBITDA multiples is that the multiples for peers are at best an approximation, since the subject company is likely to be different in one or more significant ways.

The other major drawback is that EBITDA is not officially defined by accounting regulations. Because it isn’t officially defined, it is subject to being misrepresented by business managers and others. While it serves as a quick and easy shorthand way to approximate value, it carries a significant risk of error.

To answer the question, “What is a good EBITDA multiple?” all of the above factors must be taken into consideration. A good EBITDA multiple is one that isn’t skewed by misrepresentation or misinformation and closely aligns with the characteristics of the subject business. Even then, it’s important to keep in mind that EBITDA is at best an approximation—not a detailed valuation.

When are EBITDA multiples by industry useful, and when are they not?

EBITDA multiples can be useful when there is comparability. When dealing with income-producing property where comparable properties are roughly uniform, EBITDA can give a reasonable approximation of enterprise value and is useful for evaluating stocks or making decisions for a portfolio.

For valuing tangible and intangible assets, using EBITDA to determine value becomes more difficult. In some cases, it may be possible. For example, in the power market a power purchase agreement may be present for a new project. In these rare situations it might be possible to make a comparison—the purchase agreement gives an idea of revenues, and if you can determine the market value of the comparable power plants and the difference between the subject company’s expenses compared to other companies in the same market, you can apply EBITDA. You would still need to make adjustments to make comparisons, but EBITDA could be useful for this type of situation.

In other situations the question still falls on comparability. For example, two cable companies provide similar services and products, but they have different market demographics and consumer markets making a comparison difficult to impossible. Taking a look at a real-world example, in August 2020, Lumen Technologies Inc. announced a sale of its telecommunications assets in 20 U.S. states. This followed the announcement of the sale of some of Lumen’s South American assets in July 2020. The EBITDA value for the U.S. assets was 5.5, but the South American assets had an EBITDA of 9.

It’s tempting to use these multiples to value other assets; however, the multiples reflect a business enterprise value and show that even within the same company different types of assets exist. Much of Lumen’s U.S. assets were legacy copper wire systems, while those in South America were primarily fiber optic. Additional complexity is added by the differences in technology and markets and the fact that most of these transactions reflect investment value rather than market value. The EBITDA multiples from these sales might be useful to value the business enterprise values of similarly situated businesses for similarly situated buyers, but adjustments would have to be made.

EBITDA Multiples By Industry

As noted above, EBITDA multiples vary for different industries and differently-sized companies. The size of the subject company, its profitability, its growth prospects, and the industry within which it operates will have an impact on its EBITDA multiple. The table below illustrates the differences in industry-specific average multiples; multiples for individual companies within those industries will vary based on the size of the company.

(Values in table courtesy of Professor Aswath Damodaran, NYU.)

As shown, the EBITDA multiples for different industries/business sectors vary widely. There can also be wide disparities within industries or sectors. There are several reasons for these disparities:

• First, a business with high expected growth will typically have a higher EBITDA multiple. EBITDA is a measure of financial performance, and a company with prospects for good future financial performance due to valuable contracts or intellectual property is likely to be profitable in the future. This applies to businesses in high-growth sectors such as technology. Examples from the table above include healthcare information and technology, biotechnology, professional information services, and software.

• Secondly, a business with a higher profitability margin will rate a higher EBITDA multiple. Because current profitability (EBITDA margin) is higher, more cash is likely available for distribution to shareholders as well as to create reserves to overcome adverse events, justifying a higher multiple.

• Third, a business with stable profitability that does not vary greatly from year to year will have a higher EBITDA multiple, because stability of profits is an indication that the business is less sensitive to the economic cycle. Stable profitability in the past is in most cases an indication of stable profits in the future, meaning that the risk for buyers or investors is lower; this is reflected in a higher EBITDA multiple. An example from the table above is utilities.

Conversely, industries with higher risk and lower profit margins will have lower EBITDA multiples. Examples from the table include airlines, which operate on low and cyclical profit margins and are very sensitive to changes in fuel costs and the economic cycle, and oil and gas exploration and production, which are high risk and economically cyclical.

Wireless telecommunications services are an interesting case. This industry currently has a fairly low EBITDA multiple because it has matured. Most people now have cell phones and use wireless telecom services. The EBITDA multiple for this industry would have been substantially higher in the mid-1990s, as cell phones were being adopted by large numbers of consumers and wireless networks were being expanded. Now that the market is saturated, there is much less opportunity for growth in the industry. Phones and handheld devices, on the other hand, have a much higher EBITDA multiple, because new iterations of these devices are constantly being designed, manufactured, and introduced to the market.

Current market conditions also impact EBITDA multiples. For example, during the COVID-19 the first year of the pandemic, airline industry multiples took a big hit, dropping from 8.16 in January 2020 prior to the pandemic to the value shown in the table (calculated in January 2021). The average airline EBITDA multiple calculated in May 2020 would have undoubtedly been even lower, since air travel has significantly rebounded in the interim. Market uncertainty and stress depress EBITDA multiples across industries, particularly growth-sensitive industries. As the pandemic progressed, its social and economic impacts were reflected in lower EBITDA multiples for hotels and casinos and oil and gas exploration and production. Industries like utilities and food retail were impacted less, because they were essential even when many nonessential business sectors were shut down. 

While EBITDA multiples by industry can offer insight into the growth, profitability, and stability of profits of various business sectors, and are useful for calculating a quick and easy valuation for an individual subject business, they are an estimation rather than a thorough valuation. For calculating a more comprehensive valuation for a particular business or asset, engage the services of a company experienced in providing valuation services, such as Valentiam.

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