EV to EBIT

EV/EBIT is a valuation multiple that compares Enterprise Value with EBIT. It shows at what multiple of operating profit after depreciation and amortisation a company is valued. This allows companies to be compared independently of their financing. The key difference from the better-known EV/EBITDA is that depreciation and amortisation are included, so the ongoing consumption of fixed assets is taken into account. This is precisely why the multiple is more informative in capital-intensive businesses such as manufacturing, logistics, construction or equipment rental: two companies with identical EBITDA can produce entirely different results if one must constantly invest in machinery and the other need not.

With positive enterprise value and positive EBIT, EV/EBIT exceeds EV/EBITDA where depreciation or amortisation is present, so the two factors must never be compared directly. Sensitivity to accounting choices deserves attention, since useful lives, capitalisation options and lease treatment feed straight into depreciation. In particular the different treatment of leases under IFRS and German GAAP can distort comparison. It should also be checked whether amortisation from a purchase price allocation is included, since this stems from an earlier transaction and may affect comparability with organically grown companies.

In practice the multiple is usually considered alongside the EBITDA factor, and the gap between the two shows how capital-intensive a business really is. For use in the mid-market it should be noted that depreciation policy here is often tax-driven and does not reflect economic useful life, so the factor should be formed on an adjusted basis. Lease treatment should also be checked, because lease payments may be recognised as operating expenses or through depreciation and interest, depending on the accounting framework. Without these adjustments comparisons between companies are of limited value.