How do Depreciation & Amortization impact the comparison between EV/EBIT and EV/EBITDA?

How do Depreciation & Amortization impact the comparison between EV/EBIT and EV/EBITDA?

• A. EV/EBIT includes Depreciation & Amortization, EV/EBITDA excludes it.
• B. EV/EBITDA includes Depreciation & Amortization.
• C. Both include Depreciation & Amortization.
• D. Neither include it.

Answer: (A)

Depreciation and amortization are non-cash charges that show up in operating income, so they are part of EBIT, but EBITDA removes them. The enterprise value stays the same for both multiples, but the denominator differs: EBIT reflects D&A, while EBITDA does not. If a company has a lot of D&A, EBIT will be lower due to those charges, while EBITDA stays higher since it adds back D&A. That makes EV/EBIT higher and EV/EBITDA comparatively lower. In asset-heavy firms with high D&A, the gap between the two multiples tends to widen; in lighter asset firms, the difference is smaller. So the statement that EV/EBIT includes Depreciation & Amortization while EV/EBITDA excludes it is the correct way to understand their relationship.

Depreciation and amortization are non-cash charges that show up in operating income, so they are part of EBIT, but EBITDA removes them. The enterprise value stays the same for both multiples, but the denominator differs: EBIT reflects D&A, while EBITDA does not. If a company has a lot of D&A, EBIT will be lower due to those charges, while EBITDA stays higher since it adds back D&A. That makes EV/EBIT higher and EV/EBITDA comparatively lower. In asset-heavy firms with high D&A, the gap between the two multiples tends to widen; in lighter asset firms, the difference is smaller. So the statement that EV/EBIT includes Depreciation & Amortization while EV/EBITDA excludes it is the correct way to understand their relationship.