PROBLEMS WITH USING EBITDA-BASED VALUATIONS in capital-intensive industries

In view of the significant commercial, tax and regulatory implications of the valuation outcome, this paper alerts valuers and market participants to the inherent dangers in the uncritical use of the EBITDA multiple-based method in valuing capital-intensive businesses. We show that equity valuations of established capital-intensive firms by EBITDA multiples are more susceptible to distortions than those based on NPAT multiples. These distortions arise from the inherent tendency of the former to overlook idiosyncratic, value relevant, differences below the EBITDA line between the subject company and the 'comparables' from which multiples are derived.