Technically, there are three valuation approaches, the income approach, the market approach, and the asset approach. Within approaches, there are valuation methods. For example, the single period income capitalization method is a method within the income approach. Finally, there are techniques within methods. The single period income capitalization of net income or net cash flow is one such technique. This post introduces a single period income capitalization technique to capitalize EBITDA. It should be of interest to business owners, business appraisers and market participants.

Considering the foundation we have built in the last few posts, we can now, using the total capital version of the Gordon Model, build capitalization rates and multiples for EBIT and EBITDA. We discuss the various assumptions or calculations, which are found on the numbered rows in our example table.

Many market participants and business appraisers refer to EBITDA as one measure of gross cash flow. Some business owners think about the value of their businesses in terms of rule of thumb multiples of EBITDA, say 4x to 6x, or 5x to 7x, or whatever, depending on the industry. However, Warren Buffet warns against “trumpeting EBITDA” as a “pernicious practice.” In light of both sides, we consider whether it can valuable to look at EBITDA in the context of two different public companies: Exxon and Apple. We introduce what may be a new concept in the EBITDA Depreciation Factor.

There is a fascination in the business world with something called EBITDA. Look on the audited financial statement of any company and you won’t find any such thing. But everyone, or almost everyone, is talking about EBITDA when they talk about business earnings. EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is important because, as we will see, EBITDA is the initial source of all reinvestment in a business and for all returns to shareholders. Investors and analysts focus on EBITDA because when buying a business or when valuing a business, it is necessary to make judgments about its ability to generate cash flow sufficient to meet all of the needs of the business and and to provide adequate returns to shareholders.