EV/sales ratio
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 |
|---|---|---|---|
| NWL Newell Brands Inc | 1 | $2.39B | Household & Personal Products |
| CDLX Cardlytics Inc | 1 | $102.9M | Internet Content & Information |
| DDS Dillard'S Inc | 1 | $6.74B | Department Stores |
| FTCI FTC Solar Inc | 1 | $50.98M | Solar |
| DIBS 1stdibscom Inc | 1 | $87.78M | Internet Retail |
| DTI Drilling Tools International Corporation | 1 | $84M | Oil & Gas Equipment & Services |
| PMTS CPI Card Group Inc | 1 | $243.4M | Credit Services |
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.