EV/sales ratio

Category:Ratios
Alternative names: Enterprise-Value-To-Revenue Multiple EV/R enterprise value-to-sales

What is EV/Sales

The EV/Sales ratio is a valuation metric and is calculated as the ratio between enterprise value and company’s annual revenue. The EV/Sales multiple compares the value of the company base on its revenue while adjusting for cash, debt and other liabilities.

The EV/Sales is similar to of P/S ratio but instead of market capitalisation price it uses Enterprise value (EV). It is perceived to be more meticulous than P/S because it uses EV that provides a more comprehensive estimate of the value of a company, since it is adjusted for debt and cash on the balance sheet.

How to calculate EV/Sales (formula)

The formula for calculating EV/Sales is:

EV/Sales = Enterprise Value / Revenue

Where Enterprise value is calculated as market cap plus its debt (total debt) less any cash and cash equivalents.

The revenue is the annual revenue of the company and it can be found on the income statement.

What is a good EV/Sales number

Generally good EV/Sales multiples are between 1x and 3x. Since EV/Sales is a valuation metric, from investor perspective higher value of EV/Sales can be indicative of the “expensiveness” of the valuation of the company. Conversely lower EV/Sales ratio is considered better investment opportunity as the company is considered undervalued (in relationship to its peers).

Stocks with low EV/Sales ratio

Name EV/Sales Marketcap Industry
MTB M&T Bank Corp 0.05 $16.42B Banks - Regional
ABC Amerisourcebergen Corp 0.11 $21.03B Medical Distribution
CAH Cardinal Health Inc 0.13 $16.72B Medical Distribution
MCK Mckesson Corp 0.15 $29.02B Medical Distribution
FLR Fluor Corp 0.15 $2.62B Engineering & Construction

Why is EV/Sales useful

EV/Sales is often used as a valuation multiple during company acquisitions. It’s a good way to compare valuations of different businesses from different capital structure especially if some of the businesses are not profitable. For profitable businesses it is more common to use some of the earnings based EV multiples like EV/EBITDA and EV/EBIT. However as most multiple it is important to keep in mind that this ratio does not take into account the growth potential of the business.

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