How to Answer “How do you value a company with negative EBITDA?” in Investment Banking Interviews
In investment banking interview prep, this is a common twist on core valuation: “How do you value a company with negative EBITDA?” It tests whether you can adapt standard valuation methods when the usual EBITDA multiple breaks.
A strong answer explains why EBITDA-based multiples fail, then walks through practical valuation techniques for negative EBITDA—typically revenue or gross profit multiples, a DCF built off cash flow (not EBITDA), and scenario-based thinking that ties to a path to profitability.
What This Tests in Investment Banking Technical Questions
Interviewers use this as one of those investment banking technical questions where the “right” response is less about one number and more about judgement. They want to see that you recognise negative EBITDA makes EV/EBITDA meaningless or unstable, and that you can pivot to other valuation methods without getting stuck.
They’re also testing whether you can separate accounting losses from cash burn and capital needs. For a money-losing business, value often hinges on unit economics, working capital, capex intensity, and the duration of losses—so they want you to highlight the drivers that matter rather than forcing a broken multiple.
Finally, they’re assessing communication under pressure: can you give a clean, interview-ready structure, state assumptions, and sanity-check outputs (implied margins, growth, and runway) like you would in real modelling work.
Valuation Techniques for Negative EBITDA: A Structured Framework
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Step 1: Diagnose why EBITDA-based multiples don’t work
Start by stating the issue plainly: if EBITDA is negative, EV/EBITDA is not meaningful (it can be negative or swing wildly with small EBITDA changes). Then show you understand what the market is trying to proxy with EBITDA—operating cash generation before capex and working capital—and that the business is currently not there.
Quickly add one clarifier that signals judgement: whether the negative EBITDA is temporary (investment phase, ramping utilisation, deliberate growth spend) or structural (weak gross margins, poor unit economics). That distinction guides which valuation methods and assumptions are credible.
Close this step by setting the goal: “I’d use valuation approaches that don’t rely on EBITDA today, and triangulate around a path to positive cash flow.” That frames the rest of your answer as problem-solving rather than rule-following.
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Step 2: Use appropriate multiples (revenue, gross profit) with profitability bridge
Next, present a practical set of negative EBITDA valuation methods used in banking. Commonly:
- EV/Revenue when the business has strong growth and comparable companies are also loss-making.
- EV/Gross Profit when gross margin differences are large (e.g., software vs. low-margin commerce), because it partially normalises for cost structure.
Then add the bridge that makes this interview-grade: you don’t just pick a multiple—you explain how it connects to future EBITDA. For example, you can say you’d sanity-check the implied valuation against a medium-term margin target: “If comps trade at X× revenue, what does that imply for EV/EBITDA once the company reaches Y% EBITDA margin?”
Mention key adjustments briefly: consistent revenue definitions (net vs gross), capitalised software costs, and whether you’re valuing on LTM vs NTM revenue to reflect growth. This shows you know how to value a company in practice, not just name multiples.
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Step 3: Run a DCF analysis for negative EBITDA focused on cash flow and funding needs
For DCF analysis for negative EBITDA, anchor on free cash flow, not EBITDA. Explain the workflow clearly:
- Forecast operating drivers (revenue growth, gross margin, opex as % of sales) to model a path from negative to positive EBITDA/EBIT.
- Convert to unlevered FCF with taxes (once profitable), D&A, capex, and working capital—being explicit that cash burn is often driven by reinvestment and working capital as much as the income statement.
- Incorporate the near-term reality: if the company is burning cash, it may need funding before it reaches steady-state. In a DCF, that shows up as negative FCF in early years; valuation still works as long as the business survives, so you should sanity-check liquidity/runway.
Then state how you treat the terminal value: usually after the business reaches a sustainable margin profile, using either a perpetuity growth method on steady-state FCF or an exit multiple on normalised EBITDA/EBIT (not today’s). This is the “step-by-step guide to DCF for negative EBITDA companies” interviewers want in miniature.
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Step 4: Triangulate with scenarios and survival constraints (downsides matter)
Because outcomes are wide for loss-making companies, add scenario logic as the final piece of structure. Describe 2–3 cases (base / upside / downside) tied to operational drivers rather than arbitrary valuation ranges.
Examples of scenario levers:
- Growth deceleration vs sustained growth
- Gross margin expansion vs flat margins
- Opex discipline (sales & marketing efficiency, R&D intensity)
- Working capital and capex intensity
In the downside, explicitly test “survival”: if cash burn persists, does the company require dilutive equity or expensive debt, and how would that affect equity value? You don’t need to build a full financing schedule in an interview, but you should show awareness that capital structure and dilution can dominate equity outcomes.
Finish with a triangulation statement: “I’d use revenue/gross profit multiples for market pricing, a DCF to tie value to long-term cash generation, and scenarios to reflect execution risk.” That’s a complete analyst-level framework.
Sample Answer: How to Value a Company with Losses (Analyst Level)
If EBITDA is negative, I’d start by saying EV/EBITDA isn’t a reliable tool because the denominator is below zero and small changes can swing the multiple. So I’d switch to valuation methods that don’t depend on current EBITDA and then triangulate.
First, I’d use EV/Revenue and, where margin profiles differ a lot, EV/Gross Profit, using a peer set of similar growth and business models. I’d make sure revenue definitions are consistent and typically look at NTM revenue if the company is scaling quickly. Importantly, I’d sanity-check what that multiple implies for value once the business reaches a more normal margin profile—for example, backing into an implied EV/EBITDA at a reasonable target EBITDA margin.
Second, I’d run a DCF analysis for negative EBITDA focused on unlevered free cash flow. I’d forecast the operating path to profitability—revenue growth, gross margin, and opex efficiency—then convert to FCF with working capital and capex. Early years may be cash-negative, so I’d also sanity-check liquidity and whether additional funding is required before the company turns cash-flow positive.
Finally, because outcomes are wide, I’d present base/upside/downside scenarios around the key drivers and compare the implied valuation ranges across methods. In an interview, that shows a practical approach to valuing a company with negative EBITDA while staying grounded in cash generation and risk.
- Lead with why EV/EBITDA breaks, then pivot—don’t apologise for not using it.
- Name 2–3 usable methods (revenue/gross profit multiples, DCF) and explain when each is appropriate.
- In the DCF, talk in terms of cash burn, runway, and a path to steady-state margins.
- Add one crisp sanity check (implied margins or implied multiple at maturity).
- Keep it analyst-level: structured, assumption-driven, and comparable-company aware.
Negative EBITDA Valuation Methods: Common Mistakes to Avoid
- Trying to force EV/EBITDA by “normalising” EBITDA without explaining what is truly non-recurring vs structural.
- Listing valuation techniques without tying them to business economics (unit margins, scaling of opex, working capital, capex).
- Doing a DCF that forecasts negative cash flows but ignores whether the company needs additional capital to survive to the terminal period.
- Using EV/Revenue comps without checking differences in growth, gross margin, or revenue recognition (net vs gross).
- Quoting a single point estimate and skipping scenarios, even though execution risk dominates outcomes for loss-making companies.
- Forgetting basic sanity checks like implied steady-state EBITDA margin, implied FCF margin, or implied payback period for growth spend.
Follow-Ups on DCF Analysis for Negative EBITDA and Multiples
When would you prefer EV/Gross Profit over EV/Revenue?
When gross margins vary meaningfully across peers or over time, EV/Gross Profit can better control for business quality and cost structure than revenue alone.
How do you handle terminal value in a DCF if the company is still losing money in the forecast?
I’d extend the forecast until it reaches a sustainable steady-state, then apply a terminal method on normalised FCF (or a normalised EBITDA/EBIT multiple), rather than capitalising losses.
What are the key sensitivities for a negative EBITDA DCF?
Typically the timing and level of margin expansion, revenue growth fade, reinvestment intensity (capex/working capital), and the discount rate/terminal assumptions.
How do you think about dilution if the company needs to raise capital?
I’d flag that additional funding can reduce equity value via dilution or higher net debt; in scenarios I’d incorporate higher share count or added debt to reflect financing needs.
Can you ever use EV/EBITDA for a negative EBITDA company?
Not on current EBITDA, but you can use a multiple on forward or normalised EBITDA once there’s visibility to profitability, and you should show the bridge to that level.
Financial Modelling Interview Prep: Practise and Get Feedback
- Build a 90-second version: “why EV/EBITDA fails → revenue/gross profit multiples → DCF on FCF → scenarios/sanity checks.”
- Practise saying one concrete sanity check out loud (e.g., “At a 20% target EBITDA margin, this implies ~X× EV/EBITDA”).
- In mock runs, force yourself to name the top 3 drivers you’d model (growth, gross margin, opex efficiency) and one balance-sheet driver (working capital or capex).
- Use AceTheRound to rehearse follow-ups: be ready to defend your peer multiple choice and your terminal value logic under pressure.
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