Enterprise value to earnings before interest and tax (EV/Ebit) is a way of deciding whether a share is cheap (a low number) or expensive relative to, say, its peers or the wider market.
It is similar to the commonly quoted price/earnings ratio (p/e), but modified to address some of that ratio's weaknesses. For example, rather than using just the firm's share price which ignores debt it uses enterprise value. That's the combined value of debt (less cash balances) and equity funds in the business.
This EV is then compared to earnings before, rather than after, tax and interest two costs that are not directly related to the operating profitability of a firm. That's fine, but like all ratios, it is of limited use in isolation.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
See Tim Bennett's video tutorial: Beginner's guide to investing: enterprise value.
-
Number of high-earning women jumps 12% – how to convert income into pensionsMore women than ever are paying the highest rate of tax as record numbers succeed in high paying professional roles. But their pension saving still needs to catch up
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
