What financial measure is commonly used alongside deal multiples in valuation?

The financial measure that is commonly used alongside deal multiples in valuation is Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). This metric is widely favored because it provides a clear view of a company's operating performance by stripping out non-operating expenses and accounting items that can vary greatly between companies. When valuing a business, multiples based on EBITDA help investors compare companies on a level playing field, as they focus on the core profitability of the business.

Using EBITDA as a valuation metric offers a standardized way to assess performance, enabling easier comparisons across different companies or industries. Deal multiples, such as Enterprise Value to EBITDA (EV/EBITDA), are common in M&A transactions because they provide insight into the relative valuation of companies, indicating how much investors are willing to pay for each unit of EBITDA generated.

Other measures like Return on Investment (ROI), Free Cash Flow (FCF), and Net Asset Value (NAV) serve important purposes but do not have the same level of prevalence alongside deal multiples. ROI focuses primarily on the efficiency of an investment, FCF measures cash generation after capital expenditures, and NAV is used for asset-heavy firms, making them less aligned with the typical multiples used in M&A valuations.