Which scenario is impossible regarding EV/EBITDA and EV/EBIT multiples?

To understand why one scenario might be impossible regarding EV/EBITDA and EV/EBIT multiples, it's essential to consider how these metrics relate to each other. EV/EBITDA is derived from the enterprise value (EV) divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while EV/EBIT is calculated using earnings before interest and taxes (EBIT).

The key difference between the two is that EBITDA does not account for depreciation and amortization, which are included in EBIT. Consequently, EV/EBITDA will typically yield a lower multiple than EV/EBIT, mainly because EBITDA includes cash flows that have not yet been reduced by these non-cash costs.

In the scenario where a company has an EV/EBITDA of 10x and an EV/EBIT of 8x, it contradicts the fundamental relationship between these multiples. If we have a higher EV/EBITDA, it must logically follow that the EV/EBIT would also be higher because EBIT is a subset of EBITDA. Having EV/EBIT at a lower multiple than EV/EBITDA indicates an unrealistic situation where the earnings metric for EBIT has a disproportionate effect.

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