EV-to-EBIT and Depreciation Intensity

Why Compare EV-to-EBIT and EV-to-EBITDA?

Enterprise value (EV) is a measure of the value of a firm’s operating business available to all capital providers. EBIT is earnings before interest and taxes. EBITDA is earnings before interest, taxes, depreciation, and amortization. For consistent definitions and periods, EBITDA equals EBIT plus depreciation and amortization (D&A). The two valuation multiples therefore share a numerator but use different operating earnings denominators.

EV-to-EBITDA excludes D&A from its denominator, while EV-to-EBIT includes it as an operating expense. That difference matters because D&A can be substantial for a business with significant depreciable or amortizable assets. Comparing the multiples can reveal how much D&A reduces EBIT relative to EBITDA. However, the gap between the multiples is not, by itself, a reliable ranking of asset intensity across firms: the gap also depends on EV-to-EBITDA.

Definition: EV-to-EBIT is enterprise value divided by EBIT for a specified period; EV-to-EBITDA is enterprise value divided by EBITDA for that same period. Let $D\&A$ denote depreciation and amortization expense and let $d=D\&A/EBITDA$ denote its share of EBITDA. When EBITDA is positive and EBIT is positive, $EBIT=EBITDA-D\&A$, so $0\leq d<1$.

For the comparison to be informative, the figures need consistent definitions and units. Use the same EV in both multiples, and compare it with EBIT and EBITDA for the same period, such as both trailing or both forecast figures. If EV is stated in millions of dollars, earnings should also be in millions. The multiples themselves are expressed as ratios, not as dollar amounts.

The formulas below assume positive EBITDA and positive EBIT, with D&A included consistently in the bridge from EBITDA to EBIT. If a firm reports an adjusted version of EBITDA, make sure the adjustments do not make the stated D&A-to-EBIT relationship inconsistent. EV-to-EBIT is not a conventional positive valuation multiple when EBIT is zero or negative.

The Relationship Between the Multiples

Define $M_{\text{EBITDA}}=EV/EBITDA$ and $M_{\text{EBIT}}=EV/EBIT$. Since $EBIT=EBITDA-D\&A$, the denominator for EV-to-EBIT is smaller than EBITDA when D&A is positive and EBIT remains positive. Thus, for the same EV, EV-to-EBIT is larger than EV-to-EBITDA in that case.

\begin{aligned} EBIT &= EBITDA-D\&A \\ &= EBITDA\left(1-\frac{D\&A}{EBITDA}\right) \\ &= EBITDA(1-d), \\ M_{\text{EBIT}} &= \frac{EV}{EBITDA(1-d)} = \frac{M_{\text{EBITDA}}}{1-d}. \end{aligned}

This derivation shows why the relationship depends on both the EV-to-EBITDA multiple and the D&A share. Subtracting the two multiples gives a useful expression for their gap:

M_{\text{EBIT}}-M_{\text{EBITDA}} = M_{\text{EBITDA}}\left(\frac{1}{1-d}-1\right) = M_{\text{EBITDA}}\frac{d}{1-d}.

The gap increases with $d$ when EV-to-EBITDA is held constant. Across firms with different EV-to-EBITDA multiples, however, a larger gap does not necessarily indicate a larger D&A share. A firm with a high starting multiple can have a larger gap despite a lower D&A share. To compare D&A intensity, calculate $D\&A/EBITDA$ directly or account for both factors in the gap formula.

Worked Example: Calculating Both Multiples

A hypothetical firm has EV of $1,200 million, EBITDA of $240 million, and D&A expense of $60 million for the same year. Calculate EBIT, both valuation multiples, and their gap. Then verify the relationship using the D&A share.

Method. First bridge from EBITDA to EBIT, then divide the same EV by each earnings measure. This avoids the common mistake of using EBITDA in the EV-to-EBIT denominator.

Step 1: Calculate EBIT. Subtract D&A from EBITDA:

EBIT=\$240\text{ million}-\$60\text{ million} =\$180\text{ million}.

Step 2: Calculate EV-to-EBITDA.

M_{\text{EBITDA}} =\frac{\$1{,}200\text{ million}}{\$240\text{ million}} =5.00.

Step 3: Calculate EV-to-EBIT.

M_{\text{EBIT}} =\frac{\$1{,}200\text{ million}}{\$180\text{ million}} =6.6667.

Step 4: Calculate and check the gap. The direct difference is $6.6667-5.00=1.6667$. The D&A share is $d=\$60/\$240=0.25$. The relationship gives $5.00/(1-0.25)=5.00/0.75=6.6667$, and the gap formula gives $5.00(0.25/0.75)=1.6667$. Both checks agree. The multiples are reported to four decimal places where needed.

Comparing D&A Intensity Across Firms

The D&A share $d=D\&A/EBITDA$ provides a direct way to compare how large D&A is relative to EBITDA, assuming consistent accounting definitions and periods. A higher share means a larger part of EBITDA is removed in arriving at EBIT. It does not, by itself, establish why the share is higher: the result may reflect the nature of the assets, their age, useful-life assumptions, accounting choices, or other differences.

When two firms have the same EV-to-EBITDA multiple, the firm with the higher D&A share will have both the higher EV-to-EBIT multiple and the wider gap. When their EV-to-EBITDA multiples differ, assess the D&A shares directly rather than inferring asset intensity from the gaps.

Worked Example: Comparing Firms With the Same EV-to-EBITDA

Two hypothetical firms report the following amounts for the same year. Firm A has EV of $900 million, EBITDA of $180 million, and D&A of $36 million. Firm B has EV of $1,000 million, EBITDA of $200 million, and D&A of $70 million. Calculate both multiples and D&A shares, and identify which firm has the higher D&A share.

Method. Calculate each firm’s EBIT and ratios separately, then compare the D&A shares. The same EV-to-EBITDA multiple makes the effect of the different D&A shares especially clear.

Firm A. Its EBIT is $\$180-\$36=\$144$ million. Its EV-to-EBITDA is $\$900/\$180=5.00$, and its EV-to-EBIT is $\$900/\$144=6.25$. Its D&A share is $\$36/\$180=0.20$, or 20%.

Firm B. Its EBIT is $\$200-\$70=\$130$ million. Its EV-to-EBITDA is $\$1{,}000/\$200=5.00$, and its EV-to-EBIT is $\$1{,}000/\$130=7.6923$. Its D&A share is $\$70/\$200=0.35$, or 35%.

Comparison and check. Both firms have an EV-to-EBITDA multiple of 5.00, but Firm B has the higher D&A share and the higher EV-to-EBIT multiple. For Firm A, the formula gives $5.00/(1-0.20)=6.25$; for Firm B, it gives $5.00/(1-0.35)=7.6923$. These agree with the direct calculations. The multiples are rounded to four decimal places where needed.

Worked Example: Why the Multiple Gap Alone Can Mislead

Consider two other hypothetical firms. Firm C has EV of $1,000 million, EBITDA of $100 million, and D&A of $20 million. Firm D has EV of $400 million, EBITDA of $200 million, and D&A of $100 million. Calculate each firm’s EV-to-EBITDA, EV-to-EBIT, D&A share, and gap. Which has the higher D&A share?

Method. Compute the denominator measures directly and compare both factors in the gap formula. The trap is to interpret the larger absolute gap as proof of a larger D&A share.

Firm C. EBIT is $\$100-\$20=\$80$ million. EV-to-EBITDA is $\$1{,}000/\$100=10.00$, and EV-to-EBIT is $\$1{,}000/\$80=12.50$. The gap is $12.50-10.00=2.50$. Its D&A share is $\$20/\$100=20\%$.

Firm D. EBIT is $\$200-\$100=\$100$ million. EV-to-EBITDA is $\$400/\$200=2.00$, and EV-to-EBIT is $\$400/\$100=4.00$. The gap is $4.00-2.00=2.00$. Its D&A share is $\$100/\$200=50\%$.

Comparison and check. Firm C has the larger gap, 2.50 versus 2.00, but Firm D has the higher D&A share, 50% versus 20%. The gap formula verifies both results: Firm C’s gap is $10.00(0.20/0.80)=2.50$, while Firm D’s is $2.00(0.50/0.50)=2.00$. Firm C’s much higher EV-to-EBITDA multiple more than offsets its lower D&A share. Multiples and gaps are shown to two decimal places.

Interpreting the Measures With Care

A higher EV-to-EBIT than EV-to-EBITDA is expected when D&A is positive and EBIT is positive. That observation alone is not a conclusion about whether the firm is overvalued or undervalued. It describes the relationship between EV and two different measures of operating earnings. A comparison across firms also requires attention to their businesses, measurement periods, and definitions.

D&A is an accounting expense, not a current-period cash payment. Nevertheless, excluding it from EBITDA does not make the underlying assets costless: assets may need maintenance or replacement, and intangible assets may also be amortized. EV-to-EBIT therefore retains D&A as an expense in the earnings denominator, while EV-to-EBITDA omits it. Neither multiple alone supplies a complete account of investment needs or cash generation.

The standard ratio relationship requires a positive EBITDA denominator and a positive EBIT denominator. If D&A equals EBITDA, then EBIT is zero and EV-to-EBIT is undefined. If D&A exceeds EBITDA, EBIT is negative; although division can produce a numerical result, a negative EV-to-EBIT is not conventionally interpreted as a positive earnings multiple. In these situations, state the denominator clearly rather than treating the ratio as comparable to positive multiples.

Check the inputs.
Confirm that EV, EBITDA, EBIT, and D&A use consistent units, definitions, and periods.

Bridge to EBIT.
Use $EBIT=EBITDA-D\&A$, then check whether EBIT is positive before interpreting EV-to-EBIT conventionally.

Calculate both multiples.
Divide the same EV by EBITDA and by EBIT; report units consistently so the ratios can be checked.

Interpret the comparison.
Use $D\&A/EBITDA$ to compare D&A shares. If comparing the gaps, account for both the D&A share and EV-to-EBITDA.

A common exam trap is to say that whichever firm has the larger EV-to-EBIT minus EV-to-EBITDA gap must have the higher D&A intensity. That is only justified when EV-to-EBITDA is held constant. In general, the gap is $M_{\text{EBITDA}}d/(1-d)$, so changing either factor changes the gap. The direct correction is to calculate the D&A share for each firm and compare it, while checking that EBITDA and D&A are defined on a consistent basis.

Key takeaway: For positive EBIT, EV-to-EBIT equals EV-to-EBITDA divided by $1-D\&A/EBITDA$. The multiple gap reflects both the EV-to-EBITDA level and the D&A share; it does not independently rank D&A intensity across firms.

Check Your Understanding

Work each problem using consistent units. Treat all firms and figures as hypothetical.

A firm has EV of $720 million, EBITDA of $120 million, and D&A of $30 million for the same year. Find EBIT, both multiples, and the gap. (Answer: EBIT is $90 million; EV-to-EBITDA is 6.00; EV-to-EBIT is 8.00; gap is 2.00.)
A firm has EV of $1,050 million, EBITDA of $210 million, and D&A of $63 million. Calculate the D&A share, both multiples, and the gap. (Answer: D&A share is 30%; EV-to-EBITDA is 5.00; EBIT is $147 million; EV-to-EBIT is 7.1429; gap is 2.1429.)
Firm K has EV-to-EBITDA of 8.00 and a D&A share of 25%. Firm H has EV-to-EBITDA of 4.00 and a D&A share of 40%. Calculate EV-to-EBIT and the gap for each. Which firm has the larger D&A share, and do the gaps reveal that ranking? (Answer: K has EV-to-EBIT of 10.6667 and gap 2.6667; H has EV-to-EBIT of 6.6667 and gap 2.6667. H has the larger D&A share despite equal gaps.)
A firm has EV of $540 million, EBITDA of $90 million, and D&A of $100 million. Calculate EBIT and EV-to-EBITDA. Should its EV-to-EBIT be treated as a conventional positive valuation multiple? (Answer: EBIT is negative $10 million; EV-to-EBITDA is 6.00; EV-to-EBIT is not a conventional positive valuation multiple because EBIT is negative.)
Firm R has EV-to-EBITDA of 7.00 and D&A equal to 20% of EBITDA. Firm S also has EV-to-EBITDA of 7.00, but D&A equals 30% of EBITDA. Calculate each EV-to-EBIT and gap, and explain the comparison. (Answer: R has EV-to-EBIT 8.75 and gap 1.75; S has EV-to-EBIT 10.00 and gap 3.00. With EV-to-EBITDA held constant, S’s higher D&A share produces the higher multiple and wider gap.)

What You'll Learn