EV/EBIT and EV/EBITDA
The content of this article
EV = Enterprise Value
EBIT = Earnings Before Interest & Taxes
EBITDA = Earnings before interest, tax, depreciation and amortization
Advantages of the two
EV/EBIT takes a company’s debts into account, which the common price-earnings ratio (P/E) doesn’t.
EV/EBITDA also takes debt into account, but beyond that also considers depreciation and amortization. Depreciation and amortization can significantly affect the results.
EV/EBIT – How to count + Calculator
To calculate EV/EBIT, do the following:
Step 1. Take Market Capitalization + Net Debt = EV
Step 2. Then divide EV with EBIT (also known as Operating Profit)
EV/EBIT shows what the current valuation looks like in relation to the operating profit, adjusted for interest and taxes.
Enterprise value (EV): $30,000
Operating profit (EBIT): $8,000
Calculation: 30,000 / 8,000 = 3.75
The company’s EV/EBIT is 3.75
EV/EBITDA – Calculation
To calculate EV/EBITDA, do the following:
Step1. Take Marke Capitalization + Net Debt = EV
Step 2. Then divide EV with EBITDA
EV/EBITDA shows what the current valuation looks like in relation to the operating profit, adjusted for interest, taxes, depreciation and amortization.
Enterprise value (EV): $40,000
Calculation 40,000 / 11,000 = 3.63
The company’s EV/EBITDA is 3.63
Why and how should you use these key figures/measurements?
Both EV/EBIT and EV/EBITDA are good evolutions of the classic P/E figure. These multiples take the company’s indebtedness into account, which obviously is very important. The latter, EV/EBITDA, also considers depreciation and amortization. That can largely affect the results for some companies.
With the help of these key figures, you get a much broader picture of the company you are analyzing. Simply put, you create a clearer picture of what the company is worth in relation to its results, debts, depreciation and so on.
EV/EBIT and EV/EBITDA also works well when comparing a company’s valuation to other companies within the same or a similar industry.