At first glance, valuation multiples look like simple ratios. But once you start comparing them across sectors, things get confusing fast.
Why do software companies trade at 20× EBITDA while industrials trade at 7×? Why can a biotech firm with zero profits still raise money at a billion-dollar valuation, while a profitable food company struggles to get 10× earnings? The answer isn’t about hype or speculation but is about how each sector creates value, how investors view risk and growth, and what they expect in return.
In this article, we’ll unpack the real reasons why valuation multiples differ between industries. You’ll learn how factors like margin structure, capital intensity, cyclicality, and competitive dynamics shape what the market is willing to pay—and why comparing multiples across sectors without context can lead to misleading conclusions.
Business Models Drive Multiples
The foundation of any multiple is how the business makes money and converts it into cash. Companies with recurring revenue, high margins, and low reinvestment needs often command higher multiples because they are seen as more predictable and scalable.
For example, a cloud software company with 80% gross margins and subscription-based revenue can grow rapidly without heavy capital spending. Investors are willing to pay a high EV/Revenue or EV/EBITDA multiple because much of that revenue translates into future cash flow.
In contrast, a capital-intensive manufacturer may need to constantly invest in equipment and working capital just to maintain operations. Even with similar revenue or EBITDA, its valuation will be lower because more cash is tied up in keeping the business running.
The takeaway:
Sectors with high cash flow conversion and scalability tend to trade at higher multiples. Those with asset-heavy, slower-growth models tend to trade lower—even if profits today are similar.
How Risk and Cyclicality Influence Multiples
Investors don’t just look at how much a company earns—they care about how stable those earnings are. That’s why businesses in cyclical or volatile industries typically trade at lower multiples, even when current performance looks strong.
For example, a mining company might post record EBITDA during a commodity boom. But investors know that commodity prices are unpredictable, and earnings could collapse next year. As a result, the company trades at a low EV/EBITDA multiple—because the market is pricing in the risk of a downturn.
Contrast that with a healthcare services provider or a consumer staples company. Their earnings tend to be more stable across economic cycles, so investors are willing to assign a higher multiple—even if the headline profits are lower. Predictability reduces perceived risk, and that supports valuation.
The takeaway:
Multiples reflect not just profitability, but also how sustainable and predictable that profitability is. The more cyclicality or volatility investors see, the more they discount future cash flows.
How Growth Expectations Shape Multiples
Valuation is always forward-looking. Even if a company isn’t highly profitable today, the market might still assign a high multiple if future growth is strong and believable. That’s why tech companies, biotech firms, and high-growth consumer brands often trade at multiples that look disconnected from their current earnings.
A company growing revenue at 30% per year may trade at 20× EBITDA not because its current performance justifies it, but because investors expect significantly higher earnings in the future. The multiple reflects not just today’s numbers, but also expectations of operating leverage, margin expansion, and market dominance.
Meanwhile, mature companies with flat or declining growth—like traditional utilities or telecoms—might generate strong cash flows today but still trade at low multiples. The market sees limited upside and little excitement, so the valuation reflects that stagnation.
This is why comparing a fast-scaling SaaS business to a stable industrial firm based on a single metric like EV/EBITDA can be misleading. One might look “overvalued” but be priced correctly based on future growth. The other might look “cheap” but be priced that way for a reason.
The takeaway:
High-growth expectations drive high multiples. Investors pay up for businesses that can scale quickly, expand margins, and dominate markets over time—even if profits today are modest or negative.
Closing Thoughts
Valuation multiples aren’t just numbers—they’re reflections of how the market views risk, growth, business quality, and industry dynamics. That’s why the same metric—like EV/EBITDA—can mean very different things across sectors.
Understanding why a sector trades at higher or lower multiples isn’t about spotting overvaluation or undervaluation at first glance. It’s about recognizing what drives value in that sector and how those drivers compare to others. Multiples vary because industries vary—in margins, in capital needs, in predictability, and in how much future upside investors see.
The most effective practitioners don’t use multiples in isolation. They understand the logic behind them, adjust for sector norms, and use them as part of a broader valuation framework, not a shortcut.