EV/EBITDA & EV/EBIT: Complete Guide to Stock Valuation
Most investors are aware of the usual valuation tools like Price/Earnings ratio that most investors use when trying to ascertain a company’s worth. But, analysts tend to go above that and use advanced, more insightful metrics such as EV/EBITDA and EV/EBIT. These two enterprise value ratios are especially handy for spotting undervalued stocks and comparing companies across industries and geographical locations. In this straightforward blog, we will explain EV/EBITDA and EV/EBIT in detail, how to track them, when to apply them, and why many times they are better than traditional ratios. What is Enterprise Value (EV)? Enterprise Value (EV) is a measure of a company’s total value, reflecting not just its market capitalization, but also its debt and cash positions. Formula: Enterprise Value (EV) = Market Capitalization + Total Debt – Cash & Cash Equivalents EV represents the theoretical takeover cost of a company-it’s what a buyer would pay to acquire the business, including its debt, minus its available cash. That’s why EV is considered a more accurate reflection of a firm’s value than just its market cap. What is EV/EBITDA? The full form of EV/EBITDA is Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization. This ratio measures the value of a company relative to some measure of operating performance. Formula: EV/EBITDA = Enterprise Value / EBITDA Highlights: Ideal for: What is EV/EBIT? EV/EBIT, or Enterprise Value to Earnings Before Interest and Taxes, is another popular ratio used to value businesses. Unlike EBITDA, EBIT includes depreciation and amortization, with the latter being a more conservative view of the company’s profits. Formula: EV/EBIT = Enterprise Value / EBIT Key Features: Best For: EV/EBITDA vs. EV/EBIT: Key Differences Feature EV/EBITDA EV/EBIT Depreciation Included? ❌ Excluded ✅ Included Profitability View Optimistic Conservative Cash Flow Proxy Stronger for short-term Weaker for CapEx-heavy companies CapEx Consideration Ignores CapEx impact Reflects CapEx through depreciation Ideal For Asset-light industries Asset-heavy industries Real-World Example: Indian Stocks Company Enterprise Value EBITDA (₹ Cr) EBIT (₹ Cr) EV/EBITDA EV/EBIT Sector Infosys ₹6,50,000 Cr ₹39,000 ₹33,000 16.6x 19.7x IT Services Tata Motors ₹2,70,000 Cr ₹23,000 ₹16,500 11.7x 16.3x Auto & EV Power Grid ₹2,00,000 Cr ₹27,800 ₹21,100 7.2x 9.5x Power Utility L&T ₹3,00,000 Cr ₹27,000 ₹21,000 11.1x 14.3x Infrastructure These figures show that different sectors demand different valuation lenses. For instance, Power Grid’s low EV/EBITDA and EV/EBIT may indicate undervaluation, but require deeper context like regulatory environment, debt load, and future CapEx. P/E vs. EV/EBITDA & EV/EBIT Ratio Based On Ignores Debt? Ignores CapEx? Adjusted for Cash Flow? P/E Net Income ❌ No ✅ Yes ❌ No EV/EBITDA Operating Earnings ✅ Yes ✅ Yes ✅ Closer Proxy EV/EBIT Operating Earnings ✅ Yes ❌ No ✅ More Conservative ✅ EV-based metrics offer a truer picture of the company’s operational value because they include debt, exclude cash, and focus on earnings before interest and tax effects. When to Use EV/EBITDA vs. EV/EBIT Use EV/EBITDA When: Use EV/EBIT When: Practical Implications for Investors Common Mistakes to Avoid Conclusion: EV-Based Multiples for Smarter Investing Whether you are a beginner learning about stock valuation metrics, or a seasoned investor deep into fundamental analysis, the use of EV/EBITDA and EV/EBIT will give you a better perspective regarding a company’s financial health. These ratios transcend superficial profits, taking debt and cash flow potential and operating low efficiency into account. ✔ ️ Use EV/EBITDA with companies fast-growing and capital-light. ✔ ️ Use EV/EBIT for mature asset-heavy businesses where depreciation matters. Combine the two, and a more nuanced adjusted-for-risk understanding of the company’s true value will come to you-a capability every smart investor needs in today’s fast-moving market.