What is the EBIT/EV Multiple
Profit before tax/EV Multiple is a financial ratio used to measure the company’s dividend. EBIT means profit before interest and taxes, while EV is enterprise value. The concept of this multiple as a proxy for the earnings yield was presented to Joel Greenblatt, a prominent value investor and Professor at Columbia business School.
The penetration of ‘EBIT/EV Multiple
Enterprise value market capitalization + debt + minority interest + preferred shares – cash. For the vast majority of companies as minority interest and preferred shares in the capital structure of rare EV market capitalization + debt – cash. If the EBIT/EV should be the yield, the higher the multiple, the better for the investor. Thus, there is an implicit bias toward companies with low debt and increasing cash. The company borrowed funds on the balance sheet, ceteris paribus, is more risky than companies with less leverage. Company with a small debt amounts and/or more cash will be less than EV, which will produce a higher yield.
The ratio of the EBIT/EV can provide a better comparison than more traditional profitability indicators like return on equity (ROE) or return on invested capital (ROIC). While the ratio of the EBIT/EV is not normally used, it has several key advantages in comparison to S. first, using EBIT as a measure of profitability, unlike net income, excludes the potentially negative impact of differences in tax rates. Second, using the EBIT/EV normalizes the impacts of different capital structures. Greenblatt States that EBIT “allows us to put companies with different levels of debt and different tax rates on an equal footing when comparing earnings yields.” Eve, that Greenblatt is more appropriate as denominator, because it takes into account the cost of debt and market capitalization. The disadvantage of the EBIT/EV is that it does not normalize for depreciation. Thus, there is still potential confounding effects when using different methods of asset accounting.
Example EBIT/EV multiple
Say company X has a profit before tax market cap – $3.5 billion from $40 billion, $7 billion in debt and $1.5 billion in cash. Company Z has EBIT of $1.3 billion, a market capitalization of $18 billion, $12 billion in debt and $0.6 billion in cash. EBIT/EV of company X would be approximately 7.7%, while the profitability indicators for the company Z will be about 4.4%. The profitability of company X is superior not only because it has more turnover, but also because it has a low leverage.