Enterprise value-to-sales ratio
Enterprise value/sales is a financial ratio that compares the total value (as measured by enterprise value) of the company to its sales. The ratio is, strictly speaking, denominated in years; it demonstrates how many dollars of EV are generated by one dollar of yearly sales. Generally, the lower the ratio, the cheaper the company is.[1] Some investment professionals believe—as enterprise value and sales both consider debt and equity holders—EV/Sales is superior to the oft quoted price/sales ratio.[2]
Use in valuation
[edit]The enterprise value-to-sales ratio is commonly used in relative valuation, particularly for companies that have little or no current earnings. Aswath Damodaran classifies enterprise value-to-sales as a revenue multiple that relates the value of the business to the revenues generated by the firm.[3]
Because enterprise value includes both debt and equity claims, EV/sales may be more suitable than the price-to-sales ratio when comparing firms with different capital structures. Damodaran notes that price-to-sales can produce misleading comparisons across firms in the same sector when they have different degrees of leverage, whereas value-to-sales is internally consistent because it compares firm value with firm revenues.[4]
References
[edit]- ↑ Investopedia Staff (3 July 2005). "Enterprise-Value-To-Sales - EV/Sales".
- ↑ Ltd, Market Oracle. "Valuing Cyclical Companies by Using the Price/Sales Ratio :: The Market Oracle ::". www.marketoracle.co.uk.
- ↑ "CHAPTER 10 REVENUE MULTIPLES" (PDF). New York University Stern School of Business. Retrieved 7 May 2026.
- ↑ "CHAPTER 10 REVENUE MULTIPLES" (PDF). New York University Stern School of Business. Retrieved 7 May 2026.
External links
[edit]- "Enterprise-Value-To-Sales - EV/Sales". Investopedia.
- "Valuing Cyclical Companies by Using the Price/Sales Ratio". The Market Oracle. September 30, 2008.
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