EBITDA Multiples by Industry: How Much Is Your Business Worth?

There is no universal standard for an acceptable EBITDA margin, as different industries have different cost structures, capital requirements, and profit margins. The ideal EBITDA margin varies by industry and the company’s maturity, but for software companies, a margin of 20-40% is often considered healthy. High-growth or early-stage SaaS companies might see margins lower than this due to significant reinvestments in growth. While the Foreign Currency Translation “healthy” range for EV/EBITDA varies by industry—in 2024, it ranged from about eight to 30, depending on the sector—this ratio provides critical context when analyzing a company’s value. Many analysts consider an EV/EBITDA below 10 a strong signal of an undervalued company. A negative EBITDA means that you lost money, even when you add back depreciation and amortization.

Enterprise Multiple Explained (EV/EBITDA) Valuation Ratios

One of EBITDA’s key characteristics is that it removes the impact of financing from net income. It doesn’t account for the different ways a company can use debt, equity, cash, or other capital sources to finance its operations. EBITDA also excludes the impact of non-cash expenses, such as depreciation and taxes. Depreciation artificially reduces net income, what is ebitda while taxes can vary from one period to the next and can be affected by conditions that are not directly related to a company’s operating results. By stripping away these expenses, EBITDA provides a more accurate reflection of a firm’s operating profitability. The use of EBITDA in the retail industry also requires careful consideration of the industry-specific factors that can influence EBITDA margins.

Beyond the Numbers: Qualitative Factors

EV/EBITDA is a financial ratio that is commonly used to evaluate a company’s value and performance. It measures the relationship between a company’s enterprise value (EV) and its earnings before interest, taxes, depreciation, and amortization (EBITDA). The ratio is calculated by dividing a company’s EV by its EBITDA. The second metric is called a EBITDA multiple, which is the ratio of a company’s market value to its EBITDA. This is often used when valuing companies for sale or investment, as it indicates how much someone is willing to pay for each dollar of earnings.

What is EBITDA? A Guide for Small Manufacturing Businesses

• The business services industry includes firms that support other companies.
• We use public company EBITDA multiples for calculating valuation, as they are the most widely available and reliable.
• It’s a way to look at a company’s core operating performance without the noise from financing, taxes, or accounting quirks.
• In a bullish market, investors may be more willing to pay a higher multiple for companies with strong growth prospects.
• Other factors that can influence EBITDA variations include the level of competition, the pricing power of companies, and the regulatory environment.
• The Finance Weekly is designed to help financial professionals make confident decisions online, this website contains information about FP&A products and services.

Different industries naturally have varying EBITDA-to-FCF conversion rates. Asset-light, recurring-revenue businesses often show higher conversion rates because they have minimal maintenance capital expenditures and stable working capital. On the flip side, industries like manufacturing, construction, or those with significant inventory needs usually see lower conversion rates due to equipment replacement, tooling, and inventory financing. This distinction is especially important when comparing businesses with different capital structures. For example, if a company has a revenue growth rate of 30%, its EBITDA margin should be at least 10% to meet the Rule of 40. If the company’s EBITDA margin is higher than 10%, it indicates that the company is generating additional profitability from its existing operations.

• If an HVAC company has a catalog of long-term maintenance contracts and strong diversification, for example, it’s seen as a lower risk and commands a higher multiple.
• The EBITDA margin can be used to compare the performance of different companies in the same industry, or to evaluate the changes in a company’s profitability over time.
• EBITDA, while useful, should not be the only earnings measurement you use.
• One is that the kind of ‘rule of thumb’ approach to valuing a gym you can find online – using 1-5x EBITA – is fairly crude.

EBITDA often acts as a stand-in for this calculation in many tax systems. Companies with a lot of debt need to watch EBITDA closely to make sure they can deduct interest. Companies with lots of debt may focus on boosting EBITDA to stay in lenders’ good graces. Manufacturers Accounting Periods and Methods keep pouring money into equipment and facilities—something EBITDA doesn’t show. Pharmaceutical companies can hit 25-40% margins due to patents and pricing power. But those margins can drop fast when patents expire and generics show up.