The EV/EBIT Multiple (also known as the 'Enterprise Multiple' or, more famously, the 'Acquirer's Multiple') is a valuation ratio used to measure a company's worth. It compares a company’s total value, or Enterprise Value (EV), to its annual operating profits, or EBIT (Earnings Before Interest and Taxes). Think of it this way: if you were buying a house, you wouldn't just look at the owner's equity (the down payment); you'd look at the total price, including the mortgage. The EV/EBIT multiple does just that for businesses. It calculates the total cost to acquire a company (EV) and compares it to the core profits that business generates (EBIT). This provides a far more complete picture than the popular P/E Ratio, as it accounts for both debt and cash on the balance sheet. This makes it a favorite tool for value investing purists and professionals analyzing potential takeovers.
While the P/E ratio gets all the media attention, savvy investors often prefer the EV/EBIT multiple because it tells a more honest story about a company's value and profitability.
There’s a reason it’s called the Acquirer’s Multiple. When one company buys another, the buyer assumes the target's debt but also gets its cash. Enterprise Value (EV) reflects this reality, representing the theoretical takeover price. EBIT represents the raw, operating earnings the company generates before accounting for the costs of its specific debt (interest) or its tax situation. So, the multiple answers a crucial question for a potential buyer: “For every dollar I pay for this entire business, how many dollars of pre-tax operating profit am I getting in return?”
The EV/EBIT multiple is a fantastic equalizer. By using EV, it neutralizes the effect of a company's Capital Structure. A company with a lot of cash will look cheaper, while a company with a lot of debt will look more expensive, which is exactly how an acquirer would see it. By using EBIT in the denominator, it strips out the distortions of different Tax Rates and debt levels (interest expense). This allows for a much cleaner, apples-to-apples comparison between different companies, even if they operate in different countries or use debt in different ways.
Calculating the multiple is a two-step process. First, you need to find the EV and the EBIT.
The formula itself is simple: EV / EBIT
EV = Market Capitalization + Total Debt - Cash and Cash Equivalents
EBIT = Revenue - Cost of Goods Sold (COGS) - Operating Expenses Once you have both figures, you simply divide the EV by the EBIT to get the multiple. For example, a company with an EV of $500 million and an EBIT of $50 million would have an EV/EBIT multiple of 10x.
As with most valuation metrics, “good” is relative.
However, a number in isolation is meaningless. You must compare a company's EV/EBIT multiple to its own historical range and, more importantly, to the multiples of its direct competitors and the industry average. A software company will naturally have a much higher multiple than a slow-growing utility company.
Value investors love the EV/EBIT multiple because it helps them cut through the noise and focus on what matters: buying good businesses at fair prices.
The famed investor Joel Greenblatt popularized the use of this multiple in his “Magic Formula Investing” strategy, which seeks to buy good companies (with a high return on capital) that are cheap (with a low EV/EBIT multiple). A low multiple can be a powerful signal that the market is overlooking a company's core profitability, creating a potential bargain for a patient investor who is willing to look where others aren't. It helps you find businesses that are on sale.
No single metric is a magic bullet. A low EV/EBIT multiple is a great starting point for research, not a final answer. A company might be cheap for a very good reason—its earnings could be in a steep and permanent decline. A seemingly cheap stock could be a Value Trap. Always use the EV/EBIT multiple as part of a broader analysis. Dig into the why behind the number. Is the company in a dying industry? Is it facing a major lawsuit? Or is the market simply being pessimistic? The best investments are often found in the answer to that last question.