Which multiple would be most appropriate to use for a capital-intensive industry?

In a capital-intensive industry, the EV/EBIT multiple is particularly appropriate because it considers both operating earnings and the capital structure of the company. Capital-intensive industries require significant investments in fixed assets, which may include machinery, equipment, and facilities. Traditional earnings measures, like net income, can be heavily influenced by depreciation and interest expenses, leading to a potentially distorted view of profitability when evaluating companies in such industries.

EV/EBIT captures earnings before interest and taxes, providing a measure that reflects the operational efficiency and profitability of the business without the effects of its financing structure. This is especially important in sectors like manufacturing, utilities, or telecommunications, where companies have substantial debt and fixed capital investments. The EV metric also includes the enterprise value of the company, which factors in both equity and debt, making it suitable for assessing the total valuation of the business in the context of its operational earnings.

Using P/E multiples might not give a clear picture because they can be skewed by non-operating factors and do not account for the capital invested in the business. The Price to Book ratio might offer insights into asset valuation but does not consider earnings and could mislead investors about the company’s financial performance relative to its peers. While EV/EBITDA is