Run rate
Brainteasers & GuesstimatesScaling a partial period up to a full year, for example multiplying a quarter by four, to put a figure on a comparable annual basis.
Also written: run rate EBITDA, run rating, annualising a quarter
A run rate takes a short observed period and projects it across a full year. A quarter multiplied by four, or a month multiplied by twelve, gives a figure that can be compared with an annual multiple, an annual covenant test or an annual peer set. It is a convenience, not a forecast.
It matters in a case because multiples are quoted on twelve months of earnings. Applying an 8.0x LTM multiple to one quarter of EBITDA answers a different question and understates enterprise value by roughly a factor of four, which is the single most common period error candidates make out loud.
The condition is that the period being scaled is representative. A retailer that earns a disproportionate share of its profit in the fourth quarter cannot be run rated off any single quarter without a large error in one direction or the other, and a business that has just closed an acquisition or lost a contract is not representative of itself.
Practitioners also disagree about how far to push the idea. Run rate EBITDA that includes the full year effect of cost savings not yet delivered is common in leveraged finance marketing and is treated sceptically by lenders for good reason, since it prices earnings that have not happened. Where a run rate is doing that work, say so rather than presenting it as historical.
Worked example
A business earns €35m of EBITDA in the last quarter. The run rate is 4 times €35m, or €140m.
At a marketed 8.0x on twelve month EBITDA, enterprise value is 8.0 times €140m, or €1,120m. Applying the multiple to the quarter instead gives €280m, which is the same arithmetic on the wrong basis.
If the business is seasonal, neither figure is safe. The right move is to ask for twelve months of earnings rather than to scale a quarter that may be its best or its worst.