Understanding the EBIT Multiple.

Selling a Business 5B. There are fundamental assumptions behind the EBIT multiple valuation method which limit how it should be applied. if you move to a Net Present Value formula you can better leverage potential in the business.

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[TomMcKaskill]

Correct. FCF is a much more useful way of measuring value. However, it is difficult to conceptualize and so using EBIT gets the message over of the principle of risk v.s reward. A bit like net profit is not cash. Thanks for the comment.

[jahobb]

Great Video, thank you.

[ezysoft]

Great and insightful video Tom.

[TheEquityPirate]

I'm sorry Prof, but EBIT is accrual and thus a misleading measure of earnings power. It's all about Free Cash Flow. A company can be showing millions in EBIT, but be negative in FCF, in which case the EBIT is meaningless.

[CLFBSG]

This vid is fantastic! Professor Tom McKaskill's explanation is clear and precise and extremely informative.