What is the 'Enterprise-Value-To-Revenue Multiple - EV/R'
The enterprise-value-to-revenue multiple (EV/R) is a measure of the value of a stock that compares a company's enterprise value to its revenue. EV/R is one of several fundamental indicators that investors use to determine whether a stock is priced well. The EV/R multiple is also often used to determine a company's valuation in the case of a potential acquisition.
BREAKING DOWN 'Enterprise-Value-To-Revenue Multiple - EV/R'Other valuation multiples that investors looking at EV/R would likely consider include EV/EBITDA, P/E and P/BV. EV/R is most commonly expressed as a number in decimal form followed by an x, as in 2.6x. Investors should compare EV/R for the company being analyzed to that of other public companies in the industry to get an idea of the company's relative financial health. For example, an electronics store's EV/R multiple should be compared to those of other electronics stores, not to those of food manufacturers or health care providers. This is true of any type of ratio analysis. Also, investors should always look at a variety of indicators, as no single indicator can provide an accurate picture of a company's performance.
Enterprise-Value-to-Revenue Calculation and Example
EV/R is easily calculated by taking the enterprise value of the company and dividing it by the company's revenue. To find the enterprise value of a company, use the following simplified formula:
Enterprise value = company market capitalization + total debt - cash
The following is a hypothetical example. A company has $20 million in short-term liabilities on the books and $30 million in long-term liabilities. It has $125 million worth of assets and 10% of those assets are reported as cash. There are 10 million shares of the company's common stock outstanding, and the current price per share of the stock is $18. The company reported $85 million in revenue last year.
Using this scenario, the enterprise value of the company is:
Enterprise value = (10,000,000 x $18) + ($20,000,000 + $30,000,000) - ($125,000,000 x 0.1) = $175,000,000 + $50,000,000 - $12,500,000 = $212,500,000
Next, to find the EV/R, simply take the EV and divide it by the revenue for the year:
EV/R = $212,500,000 / $85,000,000 = 2.5
Enterprise value can be calculated using a slightly more complicated formula that includes a few more variables. Some analysts prefer this method over the more simplified version. The version of enterprise value with added terms is:
EV = market capitalization + debt + preferred shared capital + minority interest - cash - cash equivalents