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EV/EBIT Ratio
Overview
The EV/EBIT ratio compares a company’s enterprise value (EV) to its earnings before interest and
taxes (EBIT). EV/EBIT is commonly used as a valuation metric to compare the relative value of
different businesses. While similar to the EV/EBITDA ratio, EV/EBIT incorporates depreciation and
amortization.
Formula
Interpretation
To calculate this ratio, the following formulas are required:
Market Capitalization = Share Price x Number of Shares
Net Debt = Market Value of Debt – Cash and Cash Equivalents
Though less commonly used than EV/EBITDA, EV/EBIT is an important ratio when it comes to
valuation. It can be used to determine a target price in an equity research report or value a company
compared to its peers. The major difference between the two ratio is EV/EBIT’s inclusion of
depreciation and amortization. This is useful for capital intensive businesses where depreciation is
a true economic cost.
In this example, Company A is going public and analysts need to determine its share price. Company
A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/EBIT
ratios for these companies respectively are 11.3x, 8.3x, 7.1x, 6.8x, and 10.2x. The average of EV/EBIT
would be 8.7x. A financial analyst would apply this 8.7x multiple to Company A’s EBIT to find its EV,
and consequently its equity value and share price.
Corporate Finance Institute
Financial Ratios
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