What is EV/EBIT?
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.
How to Calculate EV/EBIT Multiple (Step-by-Step)
Calculating the EV/EBIT multiple, or “enterprise value to EBIT”, comprises dividing the total value of the firm’s operations (i.e. enterprise value) by the company’s earnings before interest and taxes (EBIT).
- Enterprise Value → The total value of a company’s operations attributable to all stakeholders (e.g. equity shareholders, preferred stockholders, debt lenders).
- EBIT → Used interchangeably with the term “operating income”, EBIT represents the recurring profits generated by a company’s core operating activities.
The formula for calculating the EV/EBIT multiple is as follows.
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-to-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).
Like all multiples, comparisons should only be done between similar companies in the same (or adjacent) sectors, as each industry has its own standards for what the average multiple would be.
EV/EBIT vs. EV/EBITDA Multiple: What is the Difference?
Similar to the EV/EBITDA multiple, EV/EBIT is independent of the capital structure of the company, whereas multiples like the P/E ratio are impacted by financing decisions.
Since both multiples 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 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 low capital-intensity industries (e.g. service-oriented industries like consulting), then both 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 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 to EBIT Multiple: Definition, Interpretation and Issues
Enterprise Value-to-EBIT Multiple Commentary Slide (Source: WSP Trading Comps Course)