## 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.

### Key Takeaways

- 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.

## Understanding Enterprise Value-to-Revenue Multiple (EV/R)

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.

## 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.

$\begin{aligned} &\text{EV/R} = \frac{ \text{Enterprise Value} }{ \text{Revenue} } \\ &\textbf{where:}\\ &\text{Enterprise Value} = \text{MC} + \text{D} - \text{CC} \\ &\text{MC} = \text{Market capitalization} \\ &\text{D} = \text{Debt} \\ &\text{CC} = \text{Cash and cash equivalents} \\ \end{aligned}$

## 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:

$\begin{aligned} \text{Enterprise Value} &= (\$10,000,000 \times \$17.50) \\ &\quad + (\$20,000,000 + \$30,000,000) \\ &\quad - (\$125,000,000 \times 0.1) \\ &= \$175,000,000 + \$50,000,000 \\ &\quad - \$12,500,000 \\ &= \$212,500,000 \\ \end{aligned}$

Next, to find the EV/R, simply take the EV and divide it by the revenue for the year:

$\begin{aligned} \text{EV/R} &= \frac{ \$212,500,000 }{ \$85,000,000 }\\ &= 2.5 \\ \end{aligned}$

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:

$\begin{aligned} &\text{Enterprise Value} = \text{MC} + \text{D} + \text{PSC} + \text{MI} - \text{CC} \\ &\textbf{where:}\\ &\text{PSC} = \text{Preferred shared capital} \\ &\text{MI} = \text{Minority interest }\\ \end{aligned}$

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 the cash and could involve additional factors if using the expanded version.