Comparing multiples

You can calculate enterprise value and EV/EBITDA, build a simple peer comparison and explain why multiples of different companies are not directly comparable.

Value by comparison

When estate agents value a house, they rarely calculate its future rents. They look at what similar houses nearby sold for, adjust for size and condition, and arrive at a price.

Most company valuations in practice work the same way. Analysts compare a company with similar ones using multiples: how much the market pays for each dollar of profit, sales or cash. It is faster than a DCF and closer to how prices are actually set. It also has a built-in weakness.

Shares plus net debt

The P/E from chapter 2 compares the share price with profit after interest. That causes a problem: two identical businesses, one financed with debt and one without, have different P/E ratios simply because one pays interest.

Analysts solve this with enterprise value (EV): the market value of all shares, plus borrowings, minus cash. It is roughly what a buyer would have to pay to own the whole business, including taking over its debt.

For the fictional bicycle maker:

EV is then compared with a profit figure from before interest:

EV/EBITDA is the most common: 1,140 ÷ 100 = 11.4.
EV/EBIT also accounts for depreciation, useful for capital-heavy businesses.
EV/sales is used when profits are small or negative.

The comparison happens within a peer group: companies with similar products, customers, growth and risk. For the bicycle maker, that would be other bicycle and sporting-goods makers, not software firms. Analysts then adjust for differences. A peer that grows faster or has higher margins usually deserves a higher multiple.

Compare like with like

Multiples differ widely between industries. According to Aswath Damodaran's data for US companies with positive EBITDA, as of January 2026:

Software companies traded at almost three times the EV/EBITDA of homebuilders. They need little physical investment, often grow faster and earn high margins. Homebuilding is cyclical and capital-intensive.

Now suppose three fictional bicycle makers trade at 9.5, 11.4 and 14.0 times EBITDA. The one at 14.0 is not necessarily overpriced. If it grows twice as fast and has a stronger brand, its premium may be justified. The one at 9.5 may be cheap, or it may carry more debt risk or be losing market share.

The multiple tells you where to look. The reasons tell you what it means.

Common mistakes

Comparing across industries. A low EV/EBITDA for a homebuilder and a high one for software say little about either.
Treating a discount as a bargain. A lower multiple often reflects slower growth, weaker margins or higher risk.
Forgetting that multiples are relative. If the whole sector is overpriced, its cheapest member can still be expensive.
Mixing P/E with EV multiples. P/E belongs to shareholders only. EV multiples cover shareholders and lenders.

The takeaway

Multiples value a company by comparing it with similar ones. EV/EBITDA includes debt, so companies with different financing compare more fairly.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the industry valued at the lowest multiple of EBITDA.

Tap the chart.

Homebuilders traded at about 8.9 times EBITDA, grocery retailers almost the same. Software was close to three times as high.
2Shares are worth 500 million, borrowings are 300 million, cash is 50 million. What is the enterprise value?

Enterprise value = 500 + 300 − 50 = 750 million: what a buyer would pay for the whole business, debt included.
3Why do analysts often prefer EV/EBITDA to P/E when comparing companies?

P/E reflects the interest a company pays. EV/EBITDA compares the whole business with profit before interest.
4A company trades at 9 times EBITDA, its peers at 12. What is the most careful reading?

A discount to peers is a question to investigate, not an answer.

of 4 correct.

Sources

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