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EBIT/EV Multiple: Definition, Formula, Benefits, Example

The EBIT/EV multiple is a valuation metric that compares a company's earnings before interest, taxes, depreciation, and amortization (EBITDA) to its enterprise value (EV). EV is the total value of a company, including its debt and cash. The EBIT/EV multiple is used to compare companies in the same industry and to determine whether a company is undervalued or overvalued.

The formula for the EBIT/EV multiple is:

EBIT/EV = EBIT / EV

Where:

The EBIT/EV multiple can be used to compare companies in the same industry because it takes into account a company's debt and cash. A company with a high debt load will have a lower EBIT/EV multiple than a company with a lower debt load. This is because the company with the higher debt load will have to use more of its earnings to pay interest on its debt.

The EBIT/EV multiple can also be used to determine whether a company is undervalued or overvalued. A company with a low EBIT/EV multiple is considered to be undervalued, while a company with a high EBIT/EV multiple is considered to be overvalued.

Here is an example of how the EBIT/EV multiple can be used to compare companies in the same industry. Let's say we are comparing two companies, Company A and Company B. Company A has an EBIT of $100 million and an EV of $500 million. Company B has an EBIT of $50 million and an EV of $250 million.

The EBIT/EV multiple for Company A is 0.2, while the EBIT/EV multiple for Company B is 0.2. This means that Company A is more undervalued than Company B.

The EBIT/EV multiple is a useful tool for comparing companies in the same industry and for determining whether a company is undervalued or overvalued. However, it is important to note that the EBIT/EV multiple should not be used in isolation. Other factors, such as a company's growth prospects and financial strength, should also be considered when making investment decisions.