EV/Sales
EV/Sales
Enterprise value divided by revenue. The multiple of last resort for companies with no earnings yet, and a useful cross-check when margins are temporarily depressed or inflated.
When to use: Use for loss-making or early-stage companies, for turnarounds, and to compare companies within an industry where margins are similar. On its own it says nothing about profitability.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| EVtoSales | EV/Sales | Enterprise value to revenue multiple | integer |
| MarketCap | Market Cap | Equity market capitalization | $ |
| Debt | Total Debt | Interest-bearing debt | $ |
| Cash | Cash & Equivalents | Cash and short-term investments | $ |
| Revenue | Revenue | Total revenue for the period | $ |
Real-Life Examples
Example 1: Mature Industrial
Market cap $5,000M, debt $2,000M, cash $500M, revenue $4,500M.
Given
Step-by-Step
About 1.4x revenue, typical of a mature business with mid-teens operating margins. Whether that is cheap depends entirely on what margin the revenue earns.
Example 2: High-Margin Software
Market cap $12,000M, debt $1,000M, cash $3,000M, revenue $2,500M.
Given
Step-by-Step
4x revenue is only reasonable because software margins are high: at a 50% EBIT margin this is 8x EBIT, the same multiple as the previous example on earnings.
Frequently Asked Questions
Revenue belongs to the whole business, funded by both debt and equity, so it should be compared with the value of the whole business. Price-to-sales uses market cap and is distorted by leverage.