Why might one company trade at a higher EV/EBITDA multiple than another?
Model answer
EV/EBITDA captures the price the market puts on a dollar of operating cash flow. If two companies trade at different multiples, the spread is explained by some combination of growth, margins, capital intensity, risk, and quality of earnings.
First — and biggest — growth. A company growing EBITDA at 15% per year deserves a higher multiple than one growing at 3%, because the future EBITDA stream is bigger. EV/EBITDA implicitly captures this through the formula: EV/EBITDA can be derived as a function of growth, WACC, and reinvestment rates. A doubling of expected growth materially expands the multiple.
Second, margin profile. Two companies with the same revenue but different EBITDA margins reflect different underlying business quality. The higher-margin business typically gets a premium because it suggests pricing power, scale advantages, or proprietary IP — durable margin tends to be richer than fragile margin.
Third, capital intensity. EBITDA isn't free cash flow — it ignores CapEx and working capital. A capital-light software business converts EBITDA to FCF at 80%+; an industrial converts at 50% if it's CapEx-heavy. The market discounts EBITDA when it doesn't translate to cash, so a software company at 20x looks pricier than an industrial at 8x but the FCF multiples are closer than you'd think.
Fourth, risk and predictability. Recurring-revenue businesses with high retention command premium multiples relative to project-based or transactional businesses, because the future EBITDA is more visible. Cyclical exposure compresses multiples.
Fifth, quality of earnings. Are EBITDA add-backs aggressive? Is there one-time benefit baked in? A clean EBITDA gets a higher multiple than a heavily-adjusted one.
Sixth, and underrated — leverage capacity and balance sheet strength. A debt-free company can take on leverage to fund M&A or buybacks; an over-levered company can't.
Finally, sentiment and sector flows. Multiples expand and compress with the cycle. The right framing is always: what's the steady-state multiple this business deserves, and how much of the current multiple is sentiment-driven?