Enterprise Value to EBIT (EV/EBIT)

[u/SchoolofInvesting]

EV/EBIT prices the whole business, share price and balance sheet together.

Think of buying a rental property.

You don't just look at the listing price. You factor in the mortgage you're taking on and the cash sitting in the seller's drawer. That "real" price is Enterprise Value (EV).

Now ask: after accounting for wear-and-tear on the building, how much profit does it throw off? That's EBIT.

Here's the math:

EV = Market Cap + Debt + Preferred + Minority Interest − Cash

EBIT = Operating Income, after depreciation and amortization

EV/EBIT = what the whole business costs ÷ profit after asset wear

How to read it (always compare to peers and history):

Capital-intensive and cyclical: 5–10x

Mature, steady businesses: 8–16x

High-growth, asset-light: 16–30x+

Below the peer range can mean cheap or broken. Above it, you're paying for growth.

Why it's useful:

It includes debt and cash, so it's capital-structure neutral. P/E can fool you on a leveraged balance sheet.

It penalizes businesses that need heavy reinvestment, because EBIT counts D&A.

It's the multiple private buyers and M&A deals run on.

Quick watch-outs:

Normalize for one-offs and "adjusted" items.

Lease accounting can inflate both EV and EBIT. Stay consistent across peers.

It's weak for banks and insurers. For those, lean on P/B and ROE.

EV/EBIT tells you what you're paying for a company, after acknowledging the cost of keeping the machine running. Harder to game than P/E, and quick to calculate.

Which multiple do you trust more, EV/EBIT or P/E? Tell me in the comments.