EV to sales ratio

Enterprise value is the sum of a firm’s market capitalisation and its net debt (short- and long-term debt minus cash). It measures the value of a firm as represented by the contribution made by external banks and shareholders.

By comparing it to the sales figure (usually for the most recent 12-month period) you get a valuation ratio. So if a firm’s market capitalisation is £100m and its net debt is £150m, EV is £250m. If the sales figure is £25m, the EV/sales ratio is expressed as ten. The higher the multiple, the more highly rated the company.

There are some problems, however. For starters, the sales figure gives no indication of profitability or cash flow. So some analysts prefer to look at EV/Ebitda (earnings before interest, tax, depreciation and amortisation), or EV/cash flow instead.

• See Tim Bennett’s video tutorial: Beginner’s guide to investing: enterprise value.

MoneyWeek magazine

Latest issue:

Magazine cover
The hunt for water

The most valuable commodity

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Robert Shiller: why one of the world's smartest economists is worried about the bond market

Merryn Somerset Webb talks to Yale professor and Nobel Prize winner Robert Shiller about how the power of 'stories' drives the global economy and creates financial bubbles.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


27 February 1900: The Labour Party is launched

Responding to the need for a single political party to represent the trade unions, the Labour Party was formed on this day in 1900, led by MP Keir Hardie.