Enterprise Value divided by Earnings Before Interest & Tax - how many years of operating profit it would take to "buy" the whole company at today's price.
Formula
EV/EBIT = (Market Cap + Total Debt − Cash) / EBIT
What it is
EV/EBIT compares the market's total value of a business (equity + debt − cash) to its operating earnings before interest and taxes. Lower = cheaper.
Why it's better than P/E
Price/Earnings is contaminated by capital structure: a company that takes on more debt mechanically lowers its earnings (interest expense) and its share price (more leverage), and the ratio moves in unpredictable ways. EV/EBIT strips that out — it's the same answer whether the business funded itself with $100 of equity or $50 equity + $50 debt.
How to use it
Cheap: EV/EBIT < 8 — usually means either a bargain or a value trap
Fair: 8–15 — most healthy businesses
Expensive: 15–25 — premium quality usually deserves it
Watch out: > 25 — pricing in significant growth that has to actually materialise
Greenblatt's Magic Formula
Joel Greenblatt's "Magic Formula" ranks stocks by a combination of high ROIC + low EV/EBIT. The full strategy is in The Little Book That Beats the Market. Backtests show it materially outperforms the index over 17+ years.