The EV / EBIT Multiple is the ratio between enterprise value (EV) and earnings before interest and taxes (EBIT). Considered one of the most frequently used multiples for comparisons among companies, the EV / EBIT multiple relies on operating income as the core driver of valuation.
- What is the formula used to calculate the EV / EBIT multiple?
- How is the EV / EBIT multiple similar and different from the EV / EBITDA multiple?
- For which types of industries would use of the EV / EBIT multiple be the most applicable?
- How do you determine whether a EV / EBIT multiple is “high” or “low”?
EV / EBIT Formula
The formula used to calculate the EV / EBIT multiple divides the total value of the firm’s operations (i.e. enterprise value) by the company’s earnings before interest and taxes (EBIT).
Used interchangeably with the term “operating income”, EBIT represents the recurring profits generated by a company’s core operating activities.
As for all valuation multiples, the general guideline is that the value driver (the denominator) must be consistent with the valuation measure (numerator) in terms of the providers of capital represented.
The EV / EBIT multiple abides by this rule because operating income (EBIT), like enterprise value, is considered a metric independent of capital structure (i.e. is applicable to all shareholders, both debt and equity holders).
The EV / EBIT multiple should also only be used to compare similar companies in the same (or adjacent) sectors, as each industry has their own standards for what a typical EV / EBIT multiple would be.
EV / EBIT vs. EV / EBITDA
Since both the EV / EBITDA and EV / EBIT are unaffected by differences in capital structure, the two are arguably the most commonly relied-upon multiples in relative valuation.
Further, the two multiples each factor in the operating efficiency of a company (i.e. the ability to convert revenue into operating profits).
However, one noteworthy distinction between the EV / EBIT and EV / EBITDA multiple is that EV / EBIT accounts for depreciation and amortization (D&A).
If the difference in the D&A expense is marginal within the comps set, as in the case of a low capital-intensity industries (e.g. service-oriented industries like consulting), the EV / EBIT and EV / EBITDA metrics will be relatively close to one another.
But in contrast, given significant differences in D&A within capital-intensive industries (e.g. manufacturing, industrials), the fact that EV / EBIT recognizes D&A may make it a more accurate measure of value.
The recognition of D&A is associated with matching of the cash outflows with the utilization of the assets across their useful life. While D&A is a non-cash expense and thereby added back on the cash flow statement, D&A results from capital expenditures, which can be a significant (and regular) outflow for certain companies.
EV / EBIT Multiple Commentary Slide (Source: WSP Trading Comps Course)
Excel File Download
Now, we’re ready to move on to an example calculation of the EV / EBIT multiple. Fill out the form below to download the file that goes along with the tutorial.
EV / EBIT Example Calculation
In our hypothetical scenario, we’ll be comparing three different companies.
Of the three companies, two of them fall into the category of low capital intensity (i.e. having less CapEx / D&A), while one of them consists of high capital intensity (i.e. greater CapEx / D&A).
Each company shares the following financial statistics:
- Enterprise Value (EV): $1bn
- LTM EBITDA: $100mm
Upon putting these two data points together, we get an EV / LTM EBITDA of 10.0x for all three companies.
But recall from earlier, the EV / EBITDA multiple can neglect differences in capital intensity, which is the differentiating factor between the companies under comparison.
Each company has a different amount of D&A expense, with the expense being lower for the first two companies, given the reduced capital intensity.
- Company (1): D&A = $5mm
- Company (2): D&A = $7mm
- Company (3): D&A = $60mm
Clearly, the third company is an outlier due to it substantially greater D&A expense.
Next, the EV / EBIT multiple can be calculated by dividing the enterprise value (EV) by the EBIT, which we’ll complete for each company in order from left to right.
- EV / EBIT = $1bn ÷ $95mm = 10.5x
- EV / EBIT = $1bn ÷ $93mm = 10.8x
- EV / EBIT = $1bn ÷ $40mm = 25.0x
Note how the EV / EBIT does NOT differ much from the EV / EBITDA multiples for the first two companies, as those two companies are less capital intensive.
When it comes to valuing companies comprised of low capital intensity, the EV / EBIT multiple is still a useful tool, but it tends to come out in the same ballpark as the EV / EBITDA multiple.
Based on the range of EV / EBIT multiple we just calculated, the company characterized by high capital intensity (and incurs more D&A) is an outlier, and is less useful as a point of comparison versus the other two.
A screenshot of the finished output sheet has been posted below.
In conclusion, oftentimes equity analysts and investors use the EV / EBITDA multiple, which excludes the impact of D&A.
But while the EV / EBITDA multiple can come in useful when comparing capital-intensive companies with varying depreciation policies (i.e. discretionary useful life assumptions), the EV / EBIT multiple does indeed account for and recognize the D&A expense and can arguably be a more accurate measure of valuation.