Enterprise Value-to-Sales (EV/Sales)

Enterprise value-to-sales (EV/Sales) is a valuation multiple that compares a company’s enterprise value (the theoretical takeover price) to its annual sales. It helps investors gauge whether a stock appears expensive or inexpensive relative to revenue.

Key takeaways

• EV includes market capitalization plus debt minus cash (and can include preferred shares and minority interest).
• EV/Sales = Enterprise Value ÷ Annual Sales.
• Typical EV/Sales multiples often fall between 1× and 3×, but vary widely by industry.
• A lower multiple can indicate undervaluation, while a higher multiple can reflect expected future sales growth.
• Always compare EV/Sales to industry peers and consider profitability and capital structure.

Definition

Enterprise value (EV) is the cost to acquire a company’s equity and assume its debt, net of cash. EV/Sales expresses that takeover valuation as a multiple of the company’s trailing (or forward) revenue.

Formula

Basic EV/Sales:
EV/Sales = Enterprise Value ÷ Annual Sales

Common EV calculation:
Enterprise Value (EV) = Market Capitalization + Total Debt − Cash and Cash Equivalents

A more complete EV can include:
EV = Market Capitalization + Debt + Preferred Shares + Minority Interest − Cash and Cash Equivalents

How to calculate (step-by-step)

1. Calculate market capitalization: shares outstanding × share price.
2. Add interest-bearing debt (short- and long-term).
3. Subtract cash and cash equivalents.
4. If needed, add preferred shares and minority interest.
5. Divide the resulting EV by annual sales (trailing or forward, depending on intent).

Interpretation

• Lower EV/Sales: the market is valuing each dollar of revenue cheaply relative to peers — may indicate undervaluation or weak future prospects.
• Higher EV/Sales: market expects higher future growth or stronger margins per dollar of revenue.
• EV/Sales can be negative if cash exceeds market cap plus debt, implying the company could be acquired for less than its cash on hand.
• Because EV/Sales focuses on revenue, it does not account for profitability, margins, or capital intensity — companies with similar EV/Sales can have very different economics.

Example

Assume:
* Annual sales: $70 million
Shares outstanding: 5 million; share price: $25 → Market cap = 5M × $25 = $125 million
Total debt: $10 million (short-term) + $25 million (long-term) = $35 million
* Assets $90 million with 20% in cash → Cash = $90M × 20% = $18 million

EV = $125M + $35M − $18M = $142M
EV/Sales = $142M ÷ $70M = 2.03

This company has an EV/Sales multiple of about 2.0×.

EV/Sales vs. Price-to-Sales (P/S)

• P/S = Market Capitalization ÷ Sales.
• EV/Sales adjusts P/S for debt and cash, making it more appropriate when comparing firms with different capital structures or when assessing takeover value.
• P/S is quicker to compute but ignores claims by debtholders on enterprise value.

Limitations

• Requires more balance-sheet detail than P/S.
• Sales do not reflect costs, margins, or profitability; two companies with the same EV/Sales may have very different earnings power.
• Industry differences can make cross-sector comparisons misleading; capital intensity and typical margins matter.
• One-off items, accounting differences, and the choice of trailing vs. forward sales affect comparability.
• EV can be distorted by non-operating cash or nonrecurring liabilities.

Practical guidance

• Use EV/Sales as a screening tool, then analyze margins (gross, operating, net), EBITDA multiples, and cash flow to assess valuation quality.
• Compare multiples to industry peers and historical ranges for the company.
• When growth expectations are central, prefer forward sales; for stability checks, look at trailing sales.
• Watch for unusual balance-sheet items (large non-operating cash, significant minority interests, or preferred stock).