The EV/EBIT ratio is a value metric which defines the relationship between a stocks enterprise value and the underlying earnings (before interest and taxes) of the stock. EV is a measure of the companies value, it is more comprehensive than market capitalisation as it takes debt and cash holdings into account. EV can be considered the price an acquirer would have to pay in order to buy the company outright. EBIT is earnings plus non-cash expenses. EBIT can therefore help investors to compare companies with potentially different tax rates. Joel Greenblatt’s Magic Formula makes use of the earnings yield or EBIT/EV ratio (which is the inverse of EV/EBIT) to screen for high-quality companies.
A high EV/EBIT could mean that a company is overvalued, a low EV/EBIT could mean that a company is undervalued.
- We can compare a company’s EV/EBIT to it’s industry to gauge how expensive the company is relative to that industry for an apples-to-apples comparison.
- We can also compare a company’s EV/EBIT to its historical EV/EBIT to gauge if it is cheaper vs. history.