When calculating a multiple based on EBITDA or free cash flow, which value do you calculate?

Calculating a multiple based on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or free cash flow is typically done in the context of Enterprise Value (EV). Enterprise Value is a measure that reflects the total value of a business, taking into account its equity value, debt, and subtracting cash and cash equivalents. It provides a comprehensive view of a company's overall value, which is particularly relevant when benchmarking companies within the same industry, as it factors in both equity and debt.

When using EBITDA or free cash flow in valuation multiples, analysts generally prefer EV because these metrics reflect the company's operating performance without the influence of capital structure or tax rates. This allows for more consistent comparisons across companies that may have different levels of debt or different tax situations. For instance, a common multiple used is EV/EBITDA, which indicates how much investors are willing to pay for each dollar of EBITDA generated by the company, taking into account its overall capital structure.

In contrast, equity value reflects only the value attributable to shareholders and does not include the impact of debt, making it less suitable for these types of calculations. Market capitalization is simply a measure used to represent the equity value of a company and excludes debt completely. Working capital