Enterprise Value/EBIT or EV/EBIT is a similar measure as P/E ratio. 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
(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.
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