Question

Hi! What is the different between EV/EBIT and EV/EBITDA? And wich one is the best to use in valuate a business property?

Answer 1

The difference: EV/EBITDA strips out the effect of depreciation (D) and amortization (A) which are non-cash transactions. EV/EBIT does not do the above.

Just for anyone who may not know this off hand:
EV = Enterprise value.
EBITDA = Earnings before interest tax depreciation and amortization.
EV/EBITDA strips out the effect of depreciation (D) and amortization (A) from the valuation of the company. This is useful to the potential buyer (potential shareholder) as they are only interested in the cash flows for the valuation of the business.

EV/EBITDA & EV/EBIT are both unaffected by difference in capital structures and can be used to compare businesses that have different capital structure. EV/EBITDA is the best measure for compiling an index for a portfolio involving business property. When evaluating a business it is always preferable (and industry standard) to use EV/EBITDA except in the following case: If we are evaluating a business division (subsidiary) it may be very difficult to get figures for D & A for the division (these figures are usually declared as a company whole).

In this case we may use EV/EBIT to calculate a comparative index for the companies in that portfolio or we may use various adjustment techniques (sum of parts, proportionate EBITDA etc..) for the calculations related to the subsidiary.