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. Explore More Resources
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 Explore More Resources
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% Explore More Resources
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. Explore More Resources
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.