Enterprise Value to Sales Ratio (EV/Sales)

The Enterprise Value to Sales ratio is a measure used to decide whether the share price of a company is cheap or not. The higher the ratio the more expensive is the share price. It is similar to the Price/Sales ratio, but rather than just considering a firms equity value it also includes all external funding (i.e. debt).

The value also relies an Sales revenue rather than earnings. Many analysts prefer this because it is less easy to manipulate sales revenue. Also if a firm is loss making any ratio that uses earnings won't work, whereas the loss making firm is likely to still have sales revenue.

As with other ratios, on it's own it can be misleading. The sales figure is not representative of either profits or cash flow, so it may be better to use the enterprise value to sales ratio (EV/Sales) along with other measures which do look at profits and cash flow. It could also be compared with prior years to spot trends, and with similar companies or the market as a whole, to examine relative cheapness.

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We hope you found this information useful.

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