Role of Margin in Determining Multiples

foryayo's picture
Rank: Baboon | 115

I've always thought of EV / EBITDA multiples as a function of EBITDA growth and cost of capital (or riskiness / stability of cash flows). However, someone I know to be fairly experienced in finance recently mentioned that higher margin businesses trade at higher multiples than lower margin businesses. Is there some aspect here other than something that can be traced back to EBITDA growth / riskiness of cash flows? I feel there may even be some counter-arguments here, for example, a higher margin business has a greater threat of entrants which is a risk to cash flow stability. Would love to hear your thoughts...

Comments (3)

Jun 18, 2014

If two companies have the same growth rate, the company with a higher margin will be able to translate that incremental revenue into a higher incremental EBITDA than the lower margin business.

Jun 18, 2014

Yes, clearly, if "growth rate" here is talking about top-line. That's why I stated EBITDA growth instead of revenue growth or growth generally.

Jun 18, 2014