How to use the EBIT method

This method calculates a company's value according to net earnings before interest and taxes.

Many experts work with the EBIT method (Earnings Before Interest and Taxes). It is based on net earnings before interest and taxes. When buying a company, professional investors often pay five or even seven times the EBIT value, sometimes more, provided that the company regularly generates a return on equity (ROE) of a minimum of 12% and profit growth is healthy. The lower value is used for companies posting up to CHF 10 million in annual turnover, the higher value for companies exceeding CHF 20 million in annual turnover. Where applicable, an indemnity is added for assets not essential to the smooth operation of the company.

The EBIT method provides a very realistic picture. However, it is only suitable for stable companies, since young companies or rapidly-expanding companies are usually not yet making tangible profits on which to base the calculation.

Last modification 21.02.2020

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