What is Enterprise Value-To-Sales - EV/Sales

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

BREAKING DOWN Enterprise Value-To-Sales - EV/Sales

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, however, because market capitalization does not take a company's debt into account when valuing the company.

Generally, a lower EV-to-sales means that a company is believed to be more attractive or undervalued. The EV-to-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 usually are between 1 and 3.

Enterprise-Value-To-Sales Calculation and Example

The calculation of EV-to-sales is simply the enterprise value of the company divided by its sales. The enterprise value of a company is calculated using the following simplified formula:

EV/Sales = [Market Capitalization + Debt + Preferred Shares - Cash and Cash Equivalents] / Annual Sales

As an example, 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, of which 20% is 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:

Enterprise Value = Market cap (5,000,000 x $25) + Total debt ($10,000,000 + $25,000,000) - Cash ($90,000,000 x 0.2)

EV = $125,000,000 + $35,000,000 - $18,000,000 = $142,000,000

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

EV-to-sales = $142,000,000 / $70,000,000 = 2.03

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

EV = market capitalization + debt + preferred shared capital + minority interest - cash - cash equivalents