Enterprise Value to EBIT (EV/EBIT)

EV/EBIT sits between EV/EBITDA and EV/FCF in strictness. It includes depreciation and amortization (unlike EBITDA) but excludes interest and taxes, maintaining capital-structure neutrality.

Joel Greenblatt uses the inverse of EV/EBIT (EBIT/EV, called "earnings yield" in his Magic Formula) as the value component of his two-factor stock ranking system. The Magic Formula ranks all stocks by both EBIT/EV (cheap) and ROIC (high quality), then buys the top-ranked combination.

EV/EBIT is often the best enterprise multiple for comparing companies with different depreciation profiles. A company that capitalizes most of its spending (high depreciation) will look cheaper on EV/EBITDA than one that expenses spending immediately, but EV/EBIT treats them more fairly.

Lower EV/EBIT indicates cheaper enterprise valuation. The S&P 500 median has historically been around 14-18x EV/EBIT. Below 10x is often considered attractive.

Greenblatt's Magic Formula selects stocks with EBIT/EV above the market median (equivalent to EV/EBIT below the median). Backtests show this approach has generated strong long-term returns, particularly when combined with high ROIC.

EV/EBIT is more conservative than EV/EBITDA for capital-intensive businesses. A manufacturing company at 6x EV/EBITDA might be 10x EV/EBIT due to heavy depreciation - the EV/EBIT figure better reflects the ongoing cost of maintaining productive assets.

Industrial companies, where depreciation is a real economic cost, are best valued using EV/EBIT rather than EV/EBITDA. A factory with aging equipment needs to replace it; depreciation approximates that cost.

Software companies show minimal difference between EV/EBIT and EV/EBITDA because they have little depreciable asset base.

For sectors with large goodwill amortization (post-acquisition companies), EV/EBIT may overstate the true cost of operations. In these cases, adjusting for amortization of acquired intangibles can be appropriate.