What Is 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 fairly. The EV/R multiple is also often used to determine a company's valuation in the case of a potential acquisition. It’s also called the enterprise value-to-sales multiple.
The Formula for Enterprise Value-To-Revenue Multiple - EV/R Is
How to Calculate Enterprise-Value-To-Revenue Multiple - EV/R
The Enterprise Value-To-Revenue (EV/R) is easily calculated by taking the enterprise value of the company and dividing it by the company's revenue.
- Enterprise value = Market capitalization + Debt - Cash and cash equivalents
What Does Enterprise Value-To-Revenue Multiple - EV/R Tell You?
The enterprise value-to-revenue (EV/R) multiple helps compares a company’s revenues to its enterprise value. The lower the better, in that, a lower EV/R multiple signals a company is undervalued. Generally used as a valuation multiple, the EV/R is often used during acquisitions. An acquirer will use the EV/R multiple to determine an appropriate fair value. The enterprise value is used because it adds debt and takes out cash, which an acquirer would take on and receive, respectively.
- A measure of the value of a stock that compares a company's enterprise value to its revenue.
- Often used to determine a company's valuation in the case of a potential acquisition.
- Can be used for companies that do not generate income or profits.
Example of How to Use Enterprise Value-To-Revenue Multiple - EV/R
Say 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 $17.50. 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 $17.50) + ($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 and cash equivalents.
As a real-life example, consider the major retail sector, notably Wal-Mart (NYSE: WMT), Target (NYSE: TGT) and Big Lots (NYSE: BIG). The enterprise values of Wal-Mart, Target and Big Lots are $338 billion, $48.5 billion and $1.7 billion, respectively, as of Feb. 15, 2019. Meanwhile, the three have revenues over the trailing twelve months of $512 billion, $74.5 billion and $5.3 billion, respectively. Dividing each of their enterprise values by revenues means Wal-Mart’s EV/R is 0.66, Target’s is 0.65 and Big Lots’ 0.32.
The Difference Between Enterprise Value-To-Revenue Multiple (EV/R) and Enterprise Value-to-EBITDA (EV/EBITDA)
The enterprise value-to-revenue (EV/R) looks at a companies revenue-generating ability, while the enterprise value-to-EBITDA (EV/EBITDA)—also known as the enterprise multiple—looks at a company’s ability to generate cash flows. EV/EBITDA takes into operating expenses, while EV/R looks at just the top line. The advantage that EV/R has is that it can be used for companies that are yet to generate income or profits, such as the case with Amazon (NASDAQ: AMZN) in its early days.
Limitations of Using Enterprise Value-To-Revenue Multiple - EV/R
The enterprise value-to-revenue multiple should be used to compare companies in the same industry. Also, unlike market cap, which is readily available on the likes of Yahoo! Finance, the EV/R multiple requires calculating the enterprise value. This requires adding the debt and subtracting out cash, and could involve addititional factors if using the expanded version.
Learn More About Enterprise Value-To-Revenue Multiple - EV/R
See why you should use enterprise value instead of market capitalization when comparing companies.