How to Answer “When would you use EV/EBIT vs EV/EBITDA, and what are the tradeoffs?” in Investment Banking Interviews
In investment banking interview prep, a common valuation prompt is: “When would you use EV/EBIT vs EV/EBITDA, and what are the tradeoffs?” A strong answer shows you understand what each multiple is trying to measure, when each is most comparable across peers, and how accounting and capital intensity can distort the signal.
At analyst level, the goal isn’t to recite definitions—it’s to pick the right metric for the situation, explain the consequences of that choice, and show you can apply it in real valuation work (comps, screening, and model outputs).
What Interviewers Look For in This EV/EBIT vs EV/EBITDA Interview Question
This EV/EBIT vs EV/EBITDA interview question tests whether you can connect valuation metrics to real business economics. Interviewers want to see that you understand the role of depreciation and amortisation (D&A) as a proxy for capital intensity, and that you can explain how EBIT (after D&A) and EBITDA (before D&A) can lead to different “cheap vs expensive” conclusions.
They’re also assessing judgement under typical investment banking technical questions pressure: can you state a clear rule of thumb, then qualify it with the right caveats (accounting policy differences, leases, capitalised software/R&D, one-offs, cyclicality, and comparability across industries)?
Finally, they’re looking for practical modelling awareness: in financial modeling interview questions, candidates who can tie the multiple to how enterprise value bridges to equity value (and to unlevered cash flows) usually sound more credible than candidates who treat multiples as standalone ratios.
Answer Framework for Valuation Metrics (IB Technical)
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Step 1: Define both multiples and the “economic question” they answer
Start by anchoring the definitions and what is being valued.
- EV/EBITDA values the business relative to operating earnings before D&A (and before interest/taxes). It’s often used as a quick proxy for pre-capex operating cash generation, but it ignores the cost of maintaining the asset base.
- EV/EBIT values the business relative to operating earnings after D&A. It incorporates the income statement recognition of asset wear-and-tear, so it usually reflects capital intensity more than EBITDA does.
Then say the intuition in one line: use EV/EBITDA when D&A is not economically meaningful or not comparable; use EV/EBIT when D&A is a meaningful ongoing cost and you want a closer step toward true unlevered profitability.
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Step 2: Give “when to use” rules of thumb by business model and sector
Offer a structured set of scenarios (this is what interviewers want when they ask when to use EV/EBIT vs EV/EBITDA in interviews).
Use EV/EBITDA when:
- You’re comparing companies with different depreciation methods / purchase accounting effects, where D&A is noisy (e.g., acquisitive businesses with high amortisation of intangibles).
- You want a widely used, stable screening metric for services, software, or asset-light models where maintenance capex is relatively low (though you should still be careful).
- The peer set and market convention for comps is EBITDA-based (common in many sponsor-style screens).
Use EV/EBIT when:
- You’re looking at capital-intensive industries (industrials, transport, telecoms, utilities, heavy manufacturing), where D&A is a closer proxy for ongoing reinvestment needs.
- You want a multiple that is generally closer to unlevered operating profit and can be more comparable to unlevered valuation logic.
- You suspect EBITDA is overstating earnings quality because the business needs significant capex to sustain EBITDA.
Call out that neither is perfect: a capex-heavy business can still have D&A that understates true maintenance capex, and an asset-light business can still have meaningful capitalised costs that distort both metrics.
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Step 3: Explain the tradeoffs clearly (accuracy vs comparability vs manipulability)
This is where you articulate the tradeoffs between EV/EBIT and EV/EBITDA explained.
EV/EBITDA pros:
- Often more comparable across peers when D&A policies differ.
- Less impacted by purchase accounting amortisation, which can be non-cash and deal-driven.
EV/EBITDA cons:
- Can overstate economic profitability for capex-heavy businesses because it ignores the “cost” of using fixed assets.
- More vulnerable to accounting choices that shift costs below EBITDA (capitalisation policies, treatment of restructuring, add-backs).
EV/EBIT pros:
- Better at reflecting asset intensity and the ongoing cost of using the asset base.
- Typically harder to “inflate” relative to EBITDA because D&A is harder to add back without scrutiny.
EV/EBIT cons:
- Sensitive to D&A assumptions and asset age: older assets may have lower depreciation even if replacement needs are high.
- Can be distorted by acquisition accounting (step-ups increasing depreciation; amortisation of intangibles).
Close this step by linking to best practice: in real valuation metrics interview prep, you often look at both, then reconcile differences with capex intensity, accounting policies, and operating model quality.
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Step 4: Add the key adjustments and sanity checks an analyst would mention
Show you can operationalise the answer in a comps or model context.
- Normalise earnings: remove true one-offs, but don’t overuse “adjusted EBITDA” without rationale.
- Lease treatment: if peers capitalise leases differently, align lease accounting (IFRS 16 / ASC 842 effects) or at least be consistent about EV and EBITDA/EBIT definitions.
- Intangibles and amortisation: for acquisitive businesses, consider whether amortisation is economically meaningful; if it’s mostly purchase accounting, EV/EBIT may look artificially high.
- Capex reality check: compare D&A vs maintenance capex. If maintenance capex >> D&A, EV/EBIT can still overstate true economics; if maintenance capex << D&A (rare but possible), the opposite.
- Margin and multiple consistency: higher-quality, higher-return businesses can deserve higher EV/EBIT even if EV/EBITDA looks similar.
This step demonstrates how to approach EV/EBIT vs EV/EBITDA questions with the same discipline you’d apply on the desk.
Analyst Model Answer: EV/EBIT vs EV/EBITDA
EV/EBITDA is best when I want comparability and D&A is noisy; EV/EBIT is better when D&A reflects real capital intensity and I want a closer view of sustainable operating profit. The tradeoff is that EBITDA is more “standard” for screening but can overstate economics for capex-heavy businesses, while EBIT captures depreciation but is more sensitive to accounting and asset age.
In practice, I’d start with definitions: EV/EBITDA uses operating earnings before depreciation and amortisation, so it’s often used for quick comps and for peer sets where D&A differs because of depreciation policy or purchase accounting amortisation. For example, acquisitive companies can have large intangible amortisation that depresses EBIT even if underlying operations are similar, so EV/EBITDA can be a cleaner like-for-like starting point.
I’d prefer EV/EBIT when the business is capital intensive—industrials, transport, telecoms—because depreciation is a rough proxy for the ongoing cost of using fixed assets. In those cases, two companies can have similar EV/EBITDA, but the one with higher D&A and higher maintenance capex is economically less attractive, and EV/EBIT usually helps surface that.
The key sanity check is to reconcile D&A with maintenance capex and to stay consistent on adjustments—leases, non-recurring add-backs, and purchase accounting. In an interview, I’d mention I’d look at both multiples and explain any gap using capex intensity and accounting differences, which is the same logic I’d use when building comps in a model.
- Lead with a one-sentence decision rule (comparability vs capital intensity).
- Use one concrete sector example (capex-heavy vs acquisitive/intangible-heavy).
- State at least two tradeoffs: economic accuracy vs accounting noise; screening convenience vs earnings-quality risk.
- Show one analyst-style check: D&A vs maintenance capex; consistency on leases and adjustments.
- Keep the language “desk practical” rather than purely textbook.
Common Pitfalls in Investment Banking Technical Questions on Multiples
- Giving definitions but not answering “when would you use each” with clear scenarios.
- Claiming EV/EBITDA is a cash-flow multiple without acknowledging maintenance capex and working-capital needs.
- Ignoring purchase accounting: amortisation and step-ups can make EV/EBIT look misleading for acquisitive companies.
- Using “adjusted EBITDA” uncritically and assuming all add-backs are comparable across peers.
- Not mentioning capital intensity checks (D&A vs maintenance capex) and consistency of lease treatment.
- Overstating precision—both multiples are heuristics and should be triangulated with other evidence.
Follow-Ups in Financial Modeling Interview Questions (Comps & DCF Links)
How do EV/EBIT and EV/EBITDA relate to a DCF?
A DCF values unlevered free cash flow; EV/EBIT is closer to unlevered operating profit, while EV/EBITDA is a rougher proxy that still needs capex and working-capital deductions to reach cash flow.
If two companies have the same EV/EBITDA but different EV/EBIT, what could explain it?
Different D&A levels from capital intensity, asset age, depreciation policy, or acquisition accounting (step-ups and intangible amortisation) can widen the gap.
When might EV/EBIT be the wrong choice even for a capex-heavy business?
If D&A materially understates maintenance capex or accounting is distorted by recent asset write-ups/step-ups, EBIT may not reflect true ongoing reinvestment needs.
How do you handle high amortisation of acquired intangibles in multiples?
Be explicit: EV/EBIT may penalise acquisitive firms due to purchase accounting; EV/EBITDA can be more comparable, or you can analyse EBIT before amortisation of acquired intangibles with clear disclosure and consistency.
What’s one quick check to avoid being misled by EBITDA?
Compare maintenance capex and working-capital swings to EBITDA—if the business consistently converts poorly, EV/EBITDA alone may overstate value.
Valuation Metrics Interview Prep: How to Practise and Get Faster
- Practise a 60–90 second version that answers “when” first, then adds tradeoffs; this is common in investment banking technical questions.
- Build a mini peer-set story: one capex-heavy company vs one asset-light/acquisitive company, and explain how the preferred multiple changes.
- Rehearse three analyst checks you can say out loud: D&A vs maintenance capex, lease consistency, and purchase accounting effects.
- In AceTheRound, run this as a timed drill and refine until you can explain it without drifting into accounting details that don’t change the decision.
- After each practice run, note one caveat you forgot (capex, amortisation, adjustments) and add it back as a single sentence—no long detours.
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