Can Expected Future EBITDA Be an Appropriate Choice in Company Valuations?

In company valuation, the market approach rests on inferring the value of a target firm from the valuation levels at which the market prices businesses with similar economic characteristics. One of the most widely used tools in this approach is the Company Value/EBITDA (EV/EBITDA) multiple. Multiples occupy an important place in valuation practice because they are easy to apply and can reflect market expectations directly; however, the reliability of the method depends on the economic meaningfulness of the multiple used, the comparability of peer companies, and the extent to which the financial metric in the denominator represents the firm’s sustainable operating capacity (Fernandez, 2002; Kumar, 2016; São José et al., 2010).

A critical issue in the EV/EBITDA approach is not only which multiple to use, but which period’s EBITDA to place in the denominator. Using EBITDA for the trailing twelve months or the most recently completed reporting period is termed “trailing EV/EBITDA,” whereas using expected future EBITDA is termed “forward EV/EBITDA.” Especially for firms that are growing rapidly, undertaking major capacity investments, commissioning new production lines, have not yet reached normal capacity utilisation, or whose current profitability is temporarily depressed, current EBITDA may not adequately represent sustainable earnings capacity. In such cases, the forward EV/EBITDA approach may be economically more meaningful than a multiple based solely on historical or current EBITDA.

The principal theoretical justification for this approach is that company value derives not from accounting profits already earned in the past, but from the economic benefits expected to be created in the future. Under the discounted cash-flow method, company value is determined by bringing expected future free cash flows back to the valuation date using a discount rate consistent with their risks. When relative valuation is viewed in the same light, using estimated EBITDA that better represents the firm’s future operating scale and sustainable earnings capacity is consistent with valuation theory. Goedhart, Koller, and Wessels (2005) recommend the use of forward-looking multiples as one of the fundamental principles of sound multiples analysis and note that empirical studies show multiples based on forecast earnings can outperform those based on historical data.

One of the strongest empirical foundations for this view is the study by Liu, Nissim, and Thomas (2002). The authors compared the valuation performance of numerous multiples based on different value drivers and showed that multiples based on forward-looking earnings have greater power to explain equity prices than multiples based on historical earnings. In that study, indicators based on forward earnings stood out in terms of valuation performance. When Goedhart et al. (2005) report the same research findings, they note that the median pricing error for multiples based on historical earnings was about 23%, falling to 18% for one-year-forward earnings and to 16% for two-year forecasts. This result indicates that the use of forward-looking financial metrics is not merely a conceptual preference but also has an empirical basis that can reduce valuation error.

Similarly, Kim and Ritter (1999), in a study of IPO firms, showed that comparable-company valuations based on historical accounting data can produce substantial estimation error. Because young firms with high growth potential may exhibit large differences between today’s operating scale and the scale expected a few years ahead, the power of current earnings to represent economic potential can be weak. For this reason, especially for firms in investment and growth phases, using estimated EBITDA can better align the market approach with the firm’s future economic capacity.

The study by Lie and Lie (2002) also supports this view. The authors compared the success of different valuation multiples in estimating company value; they found that forecast earnings produced better results than completed-period earnings and that EBITDA-based multiples generally generated better value estimates than EBIT-based multiples. This finding strengthens the economic meaningfulness of the forward EV/EBITDA approach with respect to both the numerator and the denominator.

An important advantage of the EV/EBITDA multiple is that it is less affected by differences in capital structure than equity-based multiples. Company Value (enterprise value) encompasses the economic claims of both equity and debt providers on the firm’s operating assets, while EBITDA measures operating performance before financing costs. Therefore, in comparing firms with different leverage levels, EV/EBITDA may be more suitable than multiples such as the P/E ratio that rest solely on equity value. At the same time, because EBITDA does not directly reflect depreciation, capital expenditure, or working-capital needs, it should not be regarded as a sufficient value indicator on its own in capital-intensive industries. Hrubon (2022) likewise emphasises that, when EV/EBITDA is used, measuring EBITDA correctly and in an economically consistent manner is critical to the reliability of the valuation result.

The importance of the estimated-EBITDA approach increases especially when the results of investments undertaken as of the valuation date have not yet been fully reflected in the financial statements. During the commissioning of a new plant, production line, or capacity-expansion investment, the company may have incurred a substantial portion of capital expenditure and start-up costs while realising only a limited share of the sales and EBITDA those investments will ultimately generate. In such a case, applying a market multiple to current EBITDA may amount to valuing the firm on the basis of transition-period performance. Damodaran (2009) notes that for young and growing companies current profitability may not represent economic potential and that future revenues, margins, and cash flows should lie at the centre of valuation.

Nevertheless, using estimated EBITDA does not by itself guarantee a correct valuation. The success of the multiples method depends on the selection of comparable companies and on assessing the key economic differences between the target firm and its peers. Holthausen and Zmijewski (2012) emphasise that identifying comparable companies is one of the principal sources of error in valuation with market multiples. Operating in the same industry alone is not sufficient for economic comparability. Growth rate, operating risk, profitability, capital intensity, leverage, return on investment, geographic risks, and the firm’s stage in its life cycle must be considered together.

Gupta (2018) shows that the accuracy of valuation multiples can vary with fundamental value drivers and industry characteristics. In that study, EV/EBITDA produced low estimation errors in some sectors, while multiple levels were found to be influenced by beta, return on capital, return on equity, profit margin, and other fundamental variables. This result indicates that the average or median EV/EBITDA multiple obtained from a peer group should not be applied mechanically to the target company. Whether the multiple is consistent with the target firm’s growth, risk, and capital-efficiency characteristics must be assessed separately.

Gurov and Bochkarev (2025) likewise examine adjusting multiples for fundamental value drivers in order to improve valuation accuracy. The authors show that variables such as the cost of capital, debt burden, and expected growth can explain differences in multiples. They also find, however, that adjustments related to expected growth do not always narrow the dispersion of multiples because of forecast uncertainty. This finding clearly illustrates the principal limitation of the forward EV/EBITDA approach: basing valuation on future performance may be economically more meaningful, yet as the forecast horizon lengthens, forecast error and model risk also increase.

The effect of country risk and market conditions on multiples must also be taken into account. Gudmundsson (2016), in a study covering many countries, examined the relationship between EV/EBITDA multiples and country risk. Treating peers selected from markets with different country-risk profiles as if they shared the same multiple level may misstate the target firm’s systematic risk. Therefore, especially for companies in emerging markets, if the risk levels and costs of capital of the countries in which peer firms operate differ, necessary adjustments or prudence margins should be considered rather than applying multiples directly.

Similar care is required in the valuation of private companies. Grbenic (2021) examined the relative performance of enterprise-value multiples in private-company transactions and showed that enterprise-value multiples can be used in private-firm valuations, but that transaction type, control level, and company characteristics can affect the results. Material differences may exist between listed peers and an unlisted target with respect to size, liquidity, access to financing, institutionalisation, information transparency, and control rights. Accordingly, the forward EV/EBITDA approach can be used for private companies; however, peer multiples may need to be adapted to the target firm.

Fernandez (2002, 2019) draws attention to the importance of dispersion in multiples analysis. When the EV/EBITDA multiples of companies in the same industry span a wide range, the industry average or median cannot automatically be accepted as the correct multiple. Multiples jointly reflect firms’ growth, risk, return-on-capital, and profitability expectations. The valuers’ task is therefore not merely to find an industry multiple, but to explain the economic reasons for observed differences in multiples and to determine where the target company should sit within that distribution.

Considering estimated EBITDA over more than one year can be used to reduce dependence on a single forecast year and to represent more evenly the firm’s normalised medium-term earnings capacity. For example, EBITDA forecasts for the 2026–2030 period may help reduce the period-specific distortions that can arise from relying solely on 2025 or 2026 EBITDA for a firm undergoing rapid growth and capacity expansion. An important methodological distinction must be drawn here, however. Applying a market EV/EBITDA multiple to one- or two-year estimated EBITDA is the forward-multiple approach established in the literature. By contrast, discounting five-year EBITDA forecasts to the valuation date at the WACC and then using their average as a single representative EBITDA is not a direct component of the standard EV/EBITDA method. Such an application should more accurately be described as a “multi-year, discounted and normalised forward EBITDA approach.”

The economic rationale for this type of multi-year application is to prevent the temporary performance of a single year from excessively influencing the valuation result and to capture more evenly the sustainable operating capacity expected to be reached at the end of the growth process. Conceptual care is nevertheless required regarding the discounting of EBITDA itself at the WACC. The WACC is essentially a discount rate used to bring the free cash flows the firm will generate in the future—or future enterprise values—to present value. EBITDA, however, is not a cash flow. A theoretically more directly defensible alternative is therefore to calculate future company value for each forecast year and to discount that future company value to the valuation date.

This approach can be expressed as follows:

Estimated Company Valueₜ = Estimated EBITDAₜ × Appropriate Forward EV/EBITDA Multiple

Present Company Valueₜ = Estimated Company Valueₜ / (1 + WACC)ᵗ

Present company values calculated for multiple years may be assessed jointly through the mean, median, or a weighted average, depending on the rationale of the chosen method. It should also be borne in mind, however, that using the same multiple unchanged across all forecast years may overlook the firm’s maturation over time, the decline in its growth rate, and changes in its risk profile. Multiples used in later years should therefore, where necessary, also be reviewed for consistency with growth and risk assumptions.

In conclusion, the forward EV/EBITDA approach can be a widely used and strongly defensible method in company valuation. Especially for firms that are growing rapidly, have a material investment programme, are bringing capacity online gradually, whose current EBITDA does not reflect normalised operating capacity, or whose present profitability is depressed by temporary conditions, using estimated EBITDA can produce more meaningful results than trailing EBITDA. Liu et al. (2002), Kim and Ritter (1999), and Lie and Lie (2002) indicate that forward-looking financial metrics can improve valuation performance, while Gupta (2018), Gurov and Bochkarev (2025), Holthausen and Zmijewski (2012), Fernandez (2002, 2019), and Grbenic (2021) show that the correct peer group, appropriate value drivers, and risk differences are at least as important as using forward EBITDA. The forward EV/EBITDA method should therefore be assessed not as a universally superior technique, but as a forward-looking and conditional relative-valuation method used with regard to the target firm’s growth stage, investment programme, forecast quality, industry structure, risks, and peer-company characteristics.

References

1. Adamczyk, P., & Zbroszczyk, A. (2017). Business valuation—Practice of domestic WSE members in 2016. Finanse, Rynki Finansowe, Ubezpieczenia, 89(2), 213–223.
2. Bulau, V. (2022). Reliable enterprise valuation methods: A case study on Romania’s investment funds. European Journal of Economic and Financial Research, 6(2).
3. Damodaran, A. (2009). Valuing young, start-up and growth companies: Estimation issues and valuation challenges. Stern School of Business, New York University.
4. Ek, D., & Lillhage, J. (2012). Valuation using multiples—Accuracy and error determinants [Master’s thesis].
5. Fernandez, P. (2002). Valuation using multiples: How do analysts reach their conclusions? Social Science Research Network.
6. Fernandez, P. (2019). Valuation using multiples: Dispersion—Useful to compare and to negotiate. Social Science Research Network.
7. Franic, Z. (2016). Vrednovanje kompanije ‘Ericsson Nikola Tesla d.d.’ pomocu DCF metode, multiplikatora i statickih metoda [Diplomski rad].
8. Goedhart, M., Koller, T., & Wessels, D. (2005). The right role for multiples in valuation. McKinsey on Finance, 15.
9. Grbenic, S. O. (2021). Private firm valuation using enterprise value multiples: An examination of relative performance on minority and majority share transactions. Social Science Research Network.
10. Gudmundsson, F. S. (2016). EV/EBITDA multiples and country risk: An analysis of market data from 40 countries from January 2009 to March 2016 [Master’s thesis].
11. Gupta, V. (2018). Predicting accuracy of valuation multiples using value drivers: Evidence from Indian listed firms. Theoretical Economics Letters, 8, 776–793.
12. Gurov, I. N., & Bochkarev, A. (2025). Fundamental adjustments of multiples as a tool to the business valuation accuracy improvement. Journal of Corporate Finance Research, 19(2), 15–37.
13. Holthausen, R. W., & Zmijewski, M. E. (2012). Valuation with market multiples: How to avoid pitfalls when identifying and using comparable companies. Journal of Applied Corporate Finance, 24(3), 26–38.
14. Hrubon, L. (2022). EV/EBITDA multiple: EBITDA quantification. Ocenovani, 15(1), 5–18.
15. Kim, M., & Ritter, J. R. (1999). Valuing IPOs. Journal of Financial Economics, 53(3), 409–437.
16. Kumar, R. (2016). Relative valuation. In Valuation (pp. 179–210). Academic Press.
17. Lie, E., & Lie, H. J. (2002). Multiples used to estimate corporate value. Financial Analysts Journal, 58(2), 44–54.
18. Liu, J., Nissim, D., & Thomas, J. K. (2002). Equity valuation using multiples. Journal of Accounting Research, 40(1), 135–172.
19. Olbert, L. (2024). Financial analysts’ use of industry specific stock valuation models. Journal of Applied Accounting Research.
20. Pereira, R. A. R. (2015). Avaliação da Espirito Santo Saúde—SGPS, SA [Master’s thesis].
21. Pétursson, E. (2016). Relative valuation—Accuracy of corporate valuation using multiples [Master’s thesis].
22. Rao, U. (2016). Corporate valuation: Theoretical postulates and empirical evidence from SENSEX firms in India. Investment Management & Financial Innovations, 13(3), 30–39.
23. São José, B. O., Santos Junior, W. L., & Bordeaux-Rêgo, R. (2010). Análise de metodologias para avaliação de empresas. Engevista, 12(2), 122–135.
24. Shaffer, M., & Lee, J. (2022). Why value the enterprise en route to equity? Valuation practice in M&A. Social Science Research Network.
25. Su, W.-T. (2023). Analysis and valuation of Toyota’s—Multiple valuation method of PE ratio and EV/EBITDA ratio. BCP Business & Management, 44.
26. Tremolizzo, D. (2009). Mis-valuation of cyclical companies [Master’s thesis].
27. Valuation analysis on Amazon. (2023). Journal of Global Economy, Business and Finance, 5(1).
28. Wnuczak, P. (2018). Analiza skutecznosci mnoznikow stosowanych w wycenie metoda porównawcza. Finanse, Rynki Finansowe, Ubezpieczenia, 91, 289–298.
29. Woo, L. (2012). Equity valuation models for restaurant industry [Master’s thesis].
30. Zhang, Q. (2023). Analysis of Microsoft’s acquisition of Activision Blizzard based on precedent transaction analysis. Highlights in Business, Economics and Management, 19.
31. Zhang, Y. (2023). Analyzing Volkswagen’s value based on multiples valuation method. BCP Business & Management, 38.