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

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

What is the EBIT/EV multiple?

The EBIT/EV multiple (also called EBIT-to-enterprise-value) is a valuation ratio that expresses a company’s earnings yield. It divides operating earnings (EBIT — earnings before interest and taxes) by enterprise value (EV). A higher EBIT/EV indicates a higher earnings yield and, all else equal, a more attractive valuation.

The measure was popularized by investor Joel Greenblatt as a way to compare companies on an equal footing regardless of capital structure and tax differences.

Formula

EV = Market Capitalization + Total Debt − Cash (and cash equivalents)
EBIT/EV = EBIT ÷ EV

Note: Some EV calculations may also add minority interest and preferred stock where relevant.

Why it matters (benefits)

  • Normalizes for capital structure — EV includes debt, so the ratio compares operating earnings to the full economic value of the firm rather than just equity value.
  • Removes tax-rate distortions — using EBIT (pre-tax) avoids differences in tax burdens across companies.
  • Useful for cross-company screening — helps compare earnings yields among firms with different leverage and tax situations.
  • Practical for value-investing strategies — used as an earnings-yield metric in systematic value approaches.

Limitations

  • Does not adjust for depreciation and amortization differences — companies with heavy non-cash charges can appear artificially low or high.
  • EBIT excludes non-operating income and unusual items, which can still distort comparisons if those items are material.
  • A higher EBIT/EV is not a guarantee of quality — it may reflect transient profits, industry cyclicality, or higher business risk.

Example

Company X:
* EBIT = $3.5 billion
* Market cap = $40.0 billion
* Debt = $7.0 billion
* Cash = $1.5 billion
EV = 40.0 + 7.0 − 1.5 = $45.5 billion
EBIT/EV = 3.5 ÷ 45.5 ≈ 0.0769 = 7.7%

Company Z:
* EBIT = $1.3 billion
* Market cap = $18.0 billion
* Debt = $12.0 billion
* Cash = $0.6 billion
EV = 18.0 + 12.0 − 0.6 = $29.4 billion
EBIT/EV = 1.3 ÷ 29.4 ≈ 0.0442 = 4.4%

Interpretation: Company X has a higher earnings yield (7.7% vs. 4.4%), reflecting stronger operating earnings relative to the enterprise value and lower net leverage.

How to use it

  • Compare across peers in the same industry to identify potentially undervalued companies.
  • Combine with other metrics (e.g., return on invested capital, cash flow measures, qualitative business analysis) to avoid value traps.
  • Use consistent EV and EBIT definitions and check for one-time items or accounting differences that could skew results.

Conclusion

EBIT/EV is a compact, useful earnings-yield metric that accounts for capital structure and tax differences. It is most effective when used alongside other financial measures and a careful review of company-specific accounting and operational factors.