Advertisement

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).

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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Recommended

Economic indicators
Glossary

Economic indicators

An economic indicator is any statistic that allows us to analyse how the economy is performing or is likely to perform in future.
31 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern Monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Modern monetary theory (MMT)
Glossary

Modern monetary theory (MMT)

Modern monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".) 
14 Jul 2020
Barbell strategy
Glossary

Barbell strategy

A “barbell… investment strategy means weighting a portfolio towards the two extreme ends of an asset class with nothing in the middle.
8 Jul 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”
Investment strategy

The MoneyWeek Podcast: how to age well and profit from the “longevity dividend”

Merryn talks to economist and author Andrew J Scott and discusses how we can profit from the "longevity dividend" as we live longer; why we need to re…
6 Aug 2020