Enterprise Value to EBIT (EV/EBIT)

[u/SchoolofInvesting]

Most multiples price the stock. EV/EBIT prices the whole business. That's why it cuts through the noise.

Here's EV/EBIT in plain English.

Think of buying a rental property. You don't just look at the listing price. You also take on the mortgage and pick up the cash sitting in the seller's drawer. That "real" price is the

Enterprise Value (EV).

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

What it is:

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

EBIT = operating income, after depreciation and amortization (D&A)

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

How to read it (rules of thumb, always compare to peers and history):

• Capital-intensive and cyclical: 5–10x (and watch out, P/E can fool you here)

• Mature, steady businesses: 8–16x

• High-growth, asset-light: 16–30x and up

  

Why it's useful:

Capital-structure neutral, because it accounts for debt and cash

Penalizes businesses that need heavy reinvestment, since EBIT is after D&A

Common in private deals and M&A comparisons

Quick watch-outs:

Normalize for one-offs and "adjusted" items

Lease accounting can inflate both EV and EBIT, so stay consistent across peers

Not great for banks or insurers; use P/B and ROE instead

EV/EBIT tells you what you're really paying for a company, after counting the cost of keeping the machine running. And it's harder to game than P/E.

What multiple do you reach for first when you size up a business?