What Is Enterprise Value-to-Sales – EV/Sales?

Enterprise value-to-sales (EV/sales) is a valuation measure that compares the enterprise value (EV) of a company to its annual sales. EV-to-sales gives investors a quantifiable metric of how much it costs to purchase the company's sales.

The Formula for Enterprise Value-to-Sales – EV/Sales Is

EV/Sales=MC+DCCAnnual Saleswhere:MC=Market capitalizationD=DebtCC=Cash and cash equivalents\begin{aligned} &\text{EV/Sales} = \frac{ \text{MC} + \text{D} - \text{CC} }{ \text{Annual Sales} } \\ &\textbf{where:}\\ &\text{MC} = \text{Market capitalization} \\ &\text{D} = \text{Debt} \\ &\text{CC} = \text{Cash and cash equivalents} \\ \end{aligned}EV/Sales=Annual SalesMC+DCCwhere:MC=Market capitalizationD=DebtCC=Cash and cash equivalents

How to Calculate Enterprise Value-to-Sales – EV/Sales

Enterprise value-to-sales is calculated by:

  1. Adding total debt to a company’s market cap
  2. Subtracting out cash and cash equivalents
  3. And then dividing the result by the company’s annual sales

A slightly more complicated version of enterprise value with a few more variables is sometimes used. The more complex formula for EV is:

EV=MC+D+PS+MICCwhere:PS=Preferred sharesMI=Minority interest\begin{aligned} &\text{EV} = \text{MC} + \text{D} + \text{PS} + \text{MI} - \text{CC} \\ &\textbf{where:}\\ &\text{PS} = \text{Preferred shares} \\ &\text{MI} = \text{Minority interest} \\ \end{aligned}EV=MC+D+PS+MICCwhere:PS=Preferred sharesMI=Minority interest

What Does Enterprise Value-to-Sales (EV/Sales) Tell You?

Enterprise value-to-sales is an expansion of the price-to-sales (P/S) valuation, which uses market capitalization instead of enterprise value. It is perceived to be more accurate than P/S, in part, because the market capitalization alone does not take a company's debt into account when valuing the company.

Generally, a lower EV/sales multiple means that a company is believed to be more attractive or undervalued. The EV/sales measure can be negative when the cash in the company is greater than the market capitalization and debt structure, signaling that the company can essentially be bought with its own cash.

The EV-to-sales measure can be slightly deceptive. A high EV-to-sales can be a sign that investors believe the future sales will greatly increase. A lower EV-to-sales can signal that the future sales prospects are not very attractive. Compare the EV-to-sales to that of other companies in the industry, and look deeper into the company you are analyzing. EV-to-sales values are usually between 1 and 3.

Key Takeaways

  • EV/sales is a quantifiable metric of how much it costs to purchase a company's sales.
  • A lower EV/sales multiple means that a company is more attractive or undervalued.
  • The measurement is considered more accurate than P/S, which doesn’t take into account a company's debt load.

Example of How to Use Enterprise Value-to-Sales – EV/Sales

Assume a company reports sales for the year of $70 million. The company has $10 million of short-term liabilities on the books and $25 million of long-term liabilities. It has $90 million worth of assets, with 20% of that in cash. Lastly, the company has 5 million shares of common stock outstanding and the current price of the stock is $25 per share. Using this scenario, the company's enterprise value is:

EV=Market Cap (5 Million Shares×$25 Stock Price)+Total Debt ($10 Million+$25 Million)Cash ($90 Million×20%)=$125 Million+$35 Million$18 Million\begin{aligned} \text{EV} &= \text{Market Cap (5 Million Shares} \times \text{\$25 Stock Price)} \\ &\quad + \text{Total Debt (\$10 Million} + \text{\$25 Million)} \\ &\quad - \text{Cash (\$90 Million} \times 20\%) \\ &= \$125 \text{ Million} + \$35 \text{ Million} - \$18 \text{ Million} \\ &= \$142 \text{ Million} \end{aligned}EV=Market Cap (5 Million Shares×$25 Stock Price)+Total Debt ($10 Million+$25 Million)Cash ($90 Million×20%)=$125 Million+$35 Million$18 Million

Next, to find the EV-to-sales, simply divide the calculated enterprise value by sales. In this example, the EV-to-sales is:

EV/Sales=$142 Million$70 Million=2.03\begin{aligned} &\text{EV/Sales} = \frac{ \$142 \text{ Million} }{ \$70 \text{ Million} } = 2.03 \\ \end{aligned}EV/Sales=$70 Million$142 Million=2.03

Taking the EV/sales ratio a step further, consider Coca-Cola. The company has a market cap of $206 billion as of Jan. 31, 2019. Its total debt as of Sep. 28, 2018 was $40.6 billion. Cash and cash equivalents are $13.8 billion. Sales over the trailing 12 months for Coca-Cola have been $32.3 billion. EV for Coca-Cola is $232.8 billion, or $206 billion + $40.6 billion - $13.8 billion. Its EV/sales multiple is 7.2, or $232.8 billion / $32.3 billion.

The Difference Between EV/Sales and Price-to-Sales (P/S)

The EV-to-sales ratio takes into account the debt and cash a company has. The price-to-sales ratio, meanwhile, does not. The price-to-sales ratio is quicker to calculate, using only a company’s market cap as the numerator. However, debtholders do have a claim on sales and should theoretically be included in the valuation.

Limitations of Using Enterprise Value-to-Sales – EV/Sales

The EV/sales ratio requires calculating the enterprise value, which involves a little more digging. It’s generally used for acquisitions, where the acquirer will assume the debt of the company, but also get the cash. As well, sales do not take into account a company’s expenses or taxes.