Financial Key Ratios: EV/EBIT, EV/EBITA, EV/EBITDA, and EV/Sales

This article in our series on financial key ratios discusses the enterprise value-based multiples EV/EBITDA, EV/EBITA, EV/EBIT, and EV/Sales. Unlike the price-to-earnings ratio covered in our earlier article (link), which contrasts the valuation of a company’s equity with its earnings, these metrics take a company’s financing structure into account and measure the valuation of the entire company. This distinction makes EV-based multiples more useful for comparing companies with different levels of leverage, tax rates, and asset age profiles.

Enterprise value and measures of operating performance

Enterprise value (EV) represents the market’s total valuation of a business, regardless of its financing choices. It is calculated by adding a company’s net debt to its market capitalization. In this context, the EV is most accurately defined by including all debt-like balance sheet items that reflect claims from external parties on the company’s equity. Unlike market capitalization, which only measures the value of equity, enterprise value reflects the worth of the entire business and therefore replaces market capitalization (the “P” in the P/E ratio) as a more comprehensive measure of a company’s value.

A company’s EV is paired with pre-financing operating metrics so that capital structure does not bias the comparisons. In practice, we use EV/EBITDA, EV/EBITA, or EV/EBIT. As shown in the chart below, we start from EBITDA and deduct depreciation (D) to reach EBITA, then deduct amortization (A) to reach EBIT, followed by a deduction of interest and tax to reach net income. EBIT excludes interest by construction, so if there’s surplus, non-operating cash earning interest, it would be prudent to strip that cash out of EV to keep numerator and denominator focused on the operating business. Then, we select the denominator based on our desired control. EBITDA smooths accounting differences in D&A. EBITA removes amortization of intangibles while keeping depreciation. EBIT keeps both D&A in and tracks the operating profit the closest.

EBITDA to net income bridge

Source: Inderes

Moreover, EBITDA can overstate ongoing earnings power in asset-heavy industries when maintaining capacity requires a substantial share of total capital expenditures. In this context, adding back D&A ignores the economic cost of replacing and refurbishing the asset base, even as cash leaves through maintenance capex in the investing activities of a business. If that outflow has already happened, treating EBITDA as the marker for operational performance pretends that cost does not exist. Used this way, EBITDA misstates the operating reality of a business and, because it ignores changes in working capital, it often tracks cash flow poorly. The issue is most visible in sectors with large, fixed operating capital bases, such as mining, airlines, oil and gas, and utilities.

Matching EV to the right earnings measure

EV-based multiples are useful, but only under the condition that the chosen denominator is adequate for the type of business one is looking at. EBITDA excludes D&A, so it ignores wear and tear and can mask the cost of replacing worn assets. That is why a company can trade at ~10x on an EV/EBITDA basis yet at a much richer ~18x on EV/EBIT once depreciation and amortization are recognized. When capital intensity differs, it is prudent to lean on EV/EBIT or at least run both lenses. More broadly, multiples that ignore investment needs risk misrepresenting the economics of the business, and in inflationary periods historical-cost depreciation can lag true replacement cost, which further inflates reported earnings.

EV/EBIT: Use this ratio when you want a read on recurring operating profitability that is capital structure neutral and still reflects the economic use of long-lived assets. Since EBIT is before interest and tax, pairing it with EV keeps the numerator and denominator consistent. Fundamentally, EBIT includes depreciation and amortization, which under IFRS accounting are meant to capture the consumption of economic benefits from tangible and intangible assets. This makes the multiple especially informative when asset bases are large and replacement needs come into play.

EV/EBITDA: Use this ratio when peers have broadly similar capital intensity and asset lives, or when you specifically want to mute differences in accounting for D&A. Removing D&A can improve cross-company comparisons, which is why the ratio is widely used in relative valuation exercises. The trade-off is that EBITDA is found before reinvestments, so it is not a cash flow measure. You cannot spend EBITDA because the actual cash amount is lower after paying for maintenance capex, changes in working capital, interest, taxes, and lease payments. In asset-heavy industries, it can mask the cost of keeping assets productive, which is why large capex waves and heavy maintenance needs can distort EV/EBITDA signals. In practice, we should cross-check EV/EBITDA with EV/EBIT and look at capex/depreciation to determine if reinvestment is absorbing earnings suggested by EBITDA before they can become free cash flow.

EV/EBITA: Use this ratio when amortization of acquired intangibles is the main comparability issue and you want to neutralize M&A history while still keeping depreciation for the wear and tear of physical assets. EBITA sits between EBIT and EBITDA by adding back amortization only. The ratio can be helpful in sectors where intangible amortization varies with acquisition pacing, but definitions are less standardized, so we should state exactly which amortization is removed and apply the same treatment across the peer set. This is often an acquisition-related intangible amortization, also called purchase price allocation (PPA). Because there is no IFRS definition, EBITDA-type measures often vary in what they exclude, including cases where only amortization of acquired intangibles is added back. This is why EBITA must be clearly defined to enable fair comparisons between peers, for example.

Mind the gap

The chart below tracks Saab’s EV/EBIT and EV/EBITDA over the past five years. The two moved together for most of the period, then spread after the February 2021 release of the financial results for 2020. It was shown that COVID weighed on operations and EBIT fell harder than EBITDA as relative depreciation and amortization rose, including higher amortization from the Surveillance business area. The reported 2020 EBIT margin was ~3.7% with an adjusted EBIT of ~7.4%, which also helps explain the temporary gap between the multiples.

As activity recovered in 2021 and 2022, operating margins rebuilt and the relationship normalized, with EBIT improving to ~7.4% in 2021 and margins rising further with stronger volumes in 2022. In general, when EV/EBIT and EV/EBITDA diverge, it signals heavier D&A and/or asset replacement needs, since EBIT captures those costs while EBITDA does not. This is the main reason why spreads can widen during economic downturns and narrow as profitability and product mix improve.

SAAB’s EV/EBIT & EV/EBITDA multiples over a 5-year period

Source: Inderes & S&P Global (23/10)

A measure of value per unit of revenue for unprofitable companies

The EV/Sales multiple helps investors measure value when profits are thin or negative since it compares the value of the whole company to revenue and bypasses earnings that can be below zero. Because EV/Sales includes debt and cash, it is a cleaner anchor than P/E and is widely used in early-scale sectors where companies reinvest heavily at the cost of profitability. The multiple can be seen as a benchmark for how much investors are willing to pay per unit of revenue but should be considered alongside growth and profitability fundamentals. EV/Sales is mainly driven by operating margin, growth, and risk. Looking at a simple example: suppose two companies trade at 4x EV/Sales^[1]each. Company A has a 25% EBIT margin, so its EV/EBIT is 4/0.25 = 16x. Company B has a 5% EBIT margin, so its EV/EBIT is 4/0.05 = 80x. Same sales multiple, very different profit multiple. This is why topline multiples must be looked at together with profitability and growth, and why relying on EV/Sales alone can mislead when cost structures differ. As shown, revenue multiples look cheaper in low-margin models and higher in high-margin, high-growth models.

EV/S multiples for three fundamentally different sectors

Source: Inderes and S&P Global (October 23)

The chart above provides a visual example of the previous point by comparing the current EV/Sales ratios of the software, biotechnology, and industrials sectors. Software has the highest multiples because scalable models and recurring revenue support strong operating margins and growth fundamentals, so investors are willing to pay more per unit of sales—looking at US sector data, investors are willing to pay 13.8x EV/Sales. Biotechnology lands in the middle at 6.4x EV/Sales since it mixes very high growth potential and very good fundamentals, if things work out, with higher uncertainty. The dispersion among players in this sector tends to be very wide because the uncertainty component tends to be more significant to some than to others. Industrials tend to run lower margins and steadier growth, so the top-line is priced lower, i.e., 3.3x EV/Sales. For example, industrial companies such as machinery, aerospace and defense trade at ~3x and ~2x.

Conclusion

EV-based multiples are most effective when the denominator matches the desired economic or fundamental metric. We treat them as shorthand for valuation, and not as the valuation itself. That is why the inputs should be thoroughly defined and kept consistent, e.g., comparing companies with companies or equities with equities. All three common lenses that we have gone through share limits because they do not fully capture capital intensity or future growth, which is why EV/EBITDA can appear low for asset-heavy companies with high maintenance investments and also why cross-checks are essential. Any form of valuation tool, including these ratios, should be complemented by fundamental valuation and sector metrics (if available) to anchor conclusions in the cash flows and economics of businesses. Ultimately, no single multiple tells the whole story, but when used in this manner, EV-based multiples provide quick, comparable value signals that complement intrinsic valuation rather than replace it.

[1] Mathematically, decomposing the EV/Sales looks as follows: EV/Sales = 4x => EBIT/Sales x EV/EBIT = 4x.