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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.

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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.

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