Enterprise Value/EBIT or EV/EBIT is a similar measure as P/E ratio (P E ratio definition). Instead of the Market Value, we use the Enterprise Value and instead of the Earnings in the denominator, we use EBIT.
EV/EBIT = Enterprise Value (EV) / Earnings Before Interest and Tax (EBIT) (obviously)
You may want to use EV/EBIT if you wish a valuation metric that is neutral to the capital structure of the business. This is important to an acquirer as they may be looking to re-capitalize the business, and want to get a metric that is not distorted by the amount of debt or tax structure, or even large amounts of cash on the books
See also: book value calculation
(please note that large amount of cash on the books does distort the Price to Earnings ratio as part of the market value is in cash. The P/E ratio in this case will not reflect the operations accurately).
A high EV/EBIT ratio may indicate over valuation, while a low EV/EBIT ratio might indicate undervaluation.
See also: PEG ratio calculation
