A Multiple Times EBITDA Gives You a Share Price, But Where Does That Multiple Come From

Pricing a company turns out to be a surprisingly satisfying exercise once you try it. After all, “one multiplication gives you the share price.”

Take EBITDA and slap on a multiple of 10, no questions asked. Subtract debt, divide by share count. There you go, price per share. With a calculator it’s over in three minutes. Neat, isn’t it.

But that three-minute satisfaction is exactly what has always scared me.

EBITDA, as you know, is a type of profit. It’s the number you get before interest, taxes, and depreciation — in other words, it isolates “the cash-generating power of the business itself.” If you run a hardware business where heavy equipment means depreciation chews up profit relentlessly, looking at EBITDA instead of net income reveals the real picture more clearly. That much clicks into place.

Then you multiply this by a multiple to get the company’s price. What comes out is EV (Enterprise Value) — the price of the whole company, meaning shareholders’ claim plus debt. In M&A or fundraising, EV/EBITDA is usually the first thing people throw around on the ground. I’ve dabbled in investing as a hobby since my student days, and as someone leading a startup I’ve also sat on the side of “being priced.” That’s exactly why I say this: this “multiple” is a slippery character.

Many people think of the multiple as “a coefficient that derives future profit from current profit.” But the actual content is a bit different.

To be precise, the multiple represents all the cash a business will generate into the future, discounted for risk and summed up, compressed into a single number. In theory, multiple ≒ 1 ÷ (required return − growth rate). Higher growth expectations inflate the multiple; higher risk shrinks it. In other words, both “the future” and “how precarious it is” are folded into that one number.

Written textbook-style like that, it suddenly sounds difficult, so let me break it down.

Roughly speaking, the multiple is “how many years’ worth of current profit you’re paying upfront.” A multiple of 10 means buying the company at a cost equivalent to 10 years of its current annual profit.

But do you actually pay the full face value of those 10 years? No, you don’t. There’s no guarantee that profit will still be flowing 10 years from now. Even tomorrow is uncertain, let alone 10 years out.

So “the further into the future the profit lies, the more you discount it and count it lightly.” Next year’s profit is counted at nearly full value, 10 years out at half, 20 years out as barely more than a token amount — the discount grows the further out you go. That’s what “discounting for risk” actually means.

This is where the company’s credibility comes into play. For a company with a sound track record and strong growth, you loosen the discount because “the future will probably deliver too,” so you’re willing to pay for many years’ worth — the multiple inflates. For a shaky company, you discount the future heavily, so you can only pay for 2 to 3 years’ worth — the multiple shrinks.

In short, a single multiple simultaneously packs in “how many years you’re paying for” and “how much you trust that future.”

The multiplication method is, in a sense, a compressed version of DCF (Discounted Cash Flow method). Up to this point, it’s elegant.

The problem lies beyond this.

So in practice, how is that multiple actually decided? In most cases, it’s borrowed from comparable companies. “Similar companies trade at 8x, so ours should be 8x too.”

Wait, doesn’t that seem off?

To begin with, a truly “identical business” barely exists in this world. The judgment shouldn’t be based on whether the businesses look similar, but on whether “future growth rates and risk are similar.” Even among SaaS companies, one growing 20% a year and one flatlining deserve wildly different multiples. Yet the moment you apply the same multiple because “it’s the same industry,” you’re guaranteed to be mispricing one of them.

And there’s an even more troublesome issue.

Even if you managed to find a perfectly comparable company, that company’s stock price already has the market’s assumptions baked into it. If the whole sector is in a bubble, the multiple you borrowed stays bubbled too. Your valuation inherits the other party’s distortion wholesale.

The multiple method is structurally nothing more than “relative valuation.” All it says is “similar stuff trades at this price, so this should too.” In principle, it cannot answer the absolute question of “what is the correct price.”

Charlie Munger’s famous jab calling EBITDA “bullshit earnings” is well known, but what truly scares me isn’t EBITDA itself — it’s the multiple sitting on top of it.

That’s why professionals always run DCF alongside it. This is the calculation I described earlier as “the true nature of the multiple”: discounting future cash and summing it all up directly, without hiding it inside a multiple. With DCF, you make every assumption explicit yourself — discount rate, growth rate, capital expenditure, all of it. That’s what makes it a ruler of “absolute value” independent from the market’s collective psychology. Conversely, DCF can be pushed around however you like depending on your assumptions, so you pit it against the relative multiple, and if they diverge significantly, you ask yourself again, “which set of assumptions looks dubious?” Only through this triangulation does pricing finally hold together.

Having written this far, what strikes me is that the “single multiplication” that looked like the tastiest shortcut was actually hiding the most judgment calls.

The multiple method is easy precisely because it stuffs all the assumptions that should be made explicit one by one in DCF — growth rate, risk, choice of comparables — into that single number called “the multiple,” rendering them invisible.

The very reason it’s easy is exactly its weakness.

When we’re pleased that “one multiplication produced a share price,” we might not be calculating anything at all — we might just be borrowing someone else’s assumptions.

Incidentally, a while back I wrote an article on SpaceX’s IPO arguing “245x has got to be insane”. If you trace back the source of that sense of unease, I think it ultimately leads to this same question: where did the multiple come from in the first place?

This piece was drafted and directed by Kuzuryu, with the writing done by AI.

Originally published in Japanese at https://clazytech.com/2026/06/1661/. Translated with LLM assistance and reviewed before publication.