Which multiple is preferred when you want to exclude the capital structure, but partially factor in CapEx and Depreciation?

Which multiple is preferred when you want to exclude the capital structure, but partially factor in CapEx and Depreciation?

• A. EV/EBIT
• B. EV/EBITDA
• C. P/E
• D. EV/Sales

Answer: (A)

The EV/EBIT multiple is preferred because it removes the effects of how a company is financed (capital structure) by using enterprise value in the numerator. EBIT, being earnings before interest and taxes, already excludes financing costs, so the multiple isn’t skewed by debt or equity mix. At the same time, EBIT includes depreciation, so the ratio reflects asset wear and the associated capex implications indirectly. If you used EV/EBITDA, you’d strip out depreciation entirely, hiding capex effects. P/E and EV/Sales either depend on financing or ignore profitability details like depreciation, making them less aligned with the goal. So EV/EBIT best balances excluding capital structure while still factoring in depreciation (and by proxy capex considerations) in a meaningful way.

The EV/EBIT multiple is preferred because it removes the effects of how a company is financed (capital structure) by using enterprise value in the numerator. EBIT, being earnings before interest and taxes, already excludes financing costs, so the multiple isn’t skewed by debt or equity mix. At the same time, EBIT includes depreciation, so the ratio reflects asset wear and the associated capex implications indirectly. If you used EV/EBITDA, you’d strip out depreciation entirely, hiding capex effects. P/E and EV/Sales either depend on financing or ignore profitability details like depreciation, making them less aligned with the goal. So EV/EBIT best balances excluding capital structure while still factoring in depreciation (and by proxy capex considerations) in a meaningful way.