Enterprise value-to-sales ratio
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Enterprise value/sales is a financial ratio that compares the total value (as measured by enterprise value) of the company to its sales. The ratio is, strictly speaking, denominated in years; it demonstrates how many dollars of EV are generated by one dollar of yearly sales. Generally, the lower the ratio, the cheaper the company is.[1] Some investment professionals believe—as enterprise value and sales both consider debt and equity holders—EV/Sales is superior to the oft quoted price/sales ratio.[2]
Use in valuation
The enterprise value-to-sales ratio is commonly used in relative valuation, particularly for companies that have little or no current earnings. Aswath Damodaran classifies enterprise value-to-sales as a revenue multiple that relates the value of the business to the revenues generated by the firm.[3]
Because enterprise value includes both debt and equity claims, EV/sales may be more suitable than the price-to-sales ratio when comparing firms with different capital structures. Damodaran notes that price-to-sales can produce misleading comparisons across firms in the same sector when they have different degrees of leverage, whereas value-to-sales is internally consistent because it compares firm value with firm revenues.[4]
