hi all,

quick question...

why do some companies trade at higher EBITDA multiples than others? for instance, TMT is supposed to be the highest, while something like industrials generally trade at 4x-6x

also, ive noticed that companies with higher ebitda margins trade at higher multiples... why is that?


Comments (10)


Some industries trade at higher EBITDA multiples than others (e.g. TMT vs industrials) because they are perceived to have better growth prospects.

Not sure if this is the case, but companies with higher EBITDA margins might trade at higher multiples because a greater percentage of earnings is being re-invested back into the business. EBITDA margin measures the extent to which cash operating expenses use up revenue, so companies with higher EBITDA margins have more money being used for actual operating and business expenses rather than leakage to pay interest on debt or taxes.

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Yes, companies trading at higher multiples, all else equal are perceived to have higher growth prospects. I believe this is actually true about all multiples... aka a tech company may trade at a much higher P/E multiple than a pharmaceutical company because their earnings will grow faster... I could be wrong though. Anyone else?


The most significant factor driving EBITDA multiples is indeed growth prospects. Other factors include risk (other things being equal "OTBE", the lower the risk, the higher the multiple), size (OTBE, larger the company, higher the multiple), capex (OTBE, lower the capex, higher the multiple), working capital (OTBE, lower the working cap, higher the multiple), etc. EBITDA margins should not have an effect on EBITDA multiple but do have a large impact on a Revenue multiple.


I would argue that the overall state of the economy coupled with the industry is the most important factor. It is true that tech companies tend to trade at higher multiples, but its the financing availability and the overall risk that drives the multiples. Things such as deal size, CapX, and WC play roles as well.


Boutique, you're correct that overall market conditions (credit conditions, to be more precise) drive EBITDA multiples but the question being asked is why are companies in one industry different than those in another.


Why would credit conditions and financing availability drive multiples for firms that depend on little to no debt?

Simply put, the characteristics that drive multiples are often the same that drive cash flows: growth, risk, net investments, ROIC

Therefore, to see why multiples differ from one industry to another, look at these underlying drivers and to get a better understanding.


3 (related) reasons why credit conditions significantly impact the general level of multiples 1. multiples are relative so just because 1 company doesn't have debt doesn't mean that a comp doesn't. and even in an industry that doesn't have a lot of debt (say, tech) companies are still implicitly valued relative to companies in other industries. 2. valuation is ultimately what someone is willing to pay, right? what someone is willing to pay is dependent on how much they can pay which is dependent on how much they can borrow and even if they don't borrow it is still dependent on their cost of capital, which brings up 3. think about WACC. whats your CAPM formula? even if you could argue a company's optimal capital structure has no debt, your cost of equity is still impacted by credit conditions (risk free rate and equity risk premium). i do agree with you that a good way of thinking about what drives multiples is to think about the factors that go into a DCF.


Also consider whether the firm acquiring is a financial buyer or a strategic one. The strategic buyer is usually willing to pay more.


that's actually not true. during the LBO boom of recent years, PE firms were often able to pay more and strategics got priced out.

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