What is the Enterprise Value‑to‑Revenue Multiple (EV/R)?
The enterprise value‑to‑revenue multiple (EV/R), also called EV/Sales, is a simple valuation ratio that compares a company’s enterprise value (EV) to its revenue. It tells investors how much they would pay, on a corporate‑value basis, for each dollar of a company’s sales. EV/R is widely used for screening, cross‑company comparisons within industries, and as a quick input into acquisition or precedent‑transaction valuation work.
Key idea: EV/R = Enterprise Value ÷ Revenue. Lower EV/R often indicates cheaper valuation relative to sales, but interpretation depends heavily on industry, growth and profitability.
Source: Investopedia (Julie Bang). Examples of EV and revenue cited from Yahoo! Finance (Walmart, Target, Big Lots).
How EV and EV/R are defined
– Enterprise value (EV) is a measure of the total value of the operating business that a buyer would assume. A common (simplified) formula:
EV = Market capitalization + Total debt − Cash and cash equivalents
A more complete formula often used by analysts:
EV = Market capitalization + Debt + Preferred stock + Minority interest − Cash and cash equivalents
– Enterprise value‑to‑revenue (EV/R):
EV/R = Enterprise Value ÷ Revenue (typically trailing‑12‑months (TTM) revenue, fiscal year revenue, or forward/consensus revenue depending on context)
Worked example (step‑by‑step)
Scenario data
– Shares outstanding = 10,000,000
– Current share price = $17.50
– Short‑term liabilities = $20,000,000
– Long‑term liabilities = $30,000,000
– Total assets = $125,000,000, of which 10% is cash
– Last year’s revenue = $85,000,000
Step A — calculate market cap
Market cap = Shares outstanding × Share price
Market cap = 10,000,000 × $17.50 = $175,000,000
Step B — calculate total debt and cash
Debt = short‑term liabilities + long‑term liabilities = $20,000,000 + $30,000,000 = $50,000,000
Cash = 10% of assets = 0.10 × $125,000,000 = $12,500,000
Step C — calculate enterprise value (simplified)
EV = Market cap + Debt − Cash = $175,000,000 + $50,000,000 − $12,500,000 = $212,500,000
Step D — compute EV/R
EV/R = EV ÷ Revenue = $212,500,000 ÷ $85,000,000 = 2.5
Interpretation: This company’s enterprise value is 2.5 times last year’s revenue.
Practical steps to calculate and use EV/R
1. Choose the revenue basis
– Trailing‑12‑months (TTM) revenue is common for up‑to‑date comparisons.
– Use last fiscal year or consensus/forward revenue where appropriate (e.g., fast‑growing companies).
– Make consistent comparisons across peers (all TTM or all forward).
2. Assemble correct EV components
– Market cap = share price × shares outstanding (fully diluted if you want a conservative estimate).
– Debt = interest‑bearing debt (short + long term). Some analysts also include capital leases.
– Cash = cash and cash equivalents (can net restricted cash if relevant).
– Add preferred stock and minority interest if material.
3. Compute EV and EV/R
– EV = Market cap + Debt + Preferred + Minority interest − Cash.
– EV/R = EV ÷ chosen revenue figure.
4. Compare peers and benchmarks
– Compare companies within the same industry and with similar business models (e.g., subscription vs. transactional).
– Use median, quartiles, or a peer range rather than a single comparator.
– For valuation: implied EV = peer median EV/R × target company’s revenue.
5. Convert implied EV to implied equity value (if doing acquisition or per‑share valuation)
– Equity value = EV − Debt − Preferred − Minority interest + Cash
– Implied price per share = Equity value ÷ shares outstanding (fully diluted if desired)
6. Adjust for differences
– Normalize revenue for one‑offs, major divestitures, or acquisitions.
– Use currency and fiscal period alignment.
– Consider using forward revenue if current revenue understates future potential.
How to use EV/R in valuation and M&A
– Quick screening: Find companies with unusually high or low EV/R relative to peers.
– Precedent multiples: Multiply peer EV/R by target revenue to estimate enterprise value for an acquisition.
– Early‑stage companies: EV/R can be used for companies not yet profitable (no EBITDA or positive earnings).
– Cross‑sector caution: EV/R varies widely by sector—e.g., low‑margin retail often has low EV/R (<1), while high‑growth SaaS/tech companies frequently trade at much higher EV/R (several times revenue).
EV/R vs EV/EBITDA (and other profit multiples)
– EV/R focuses on top‑line (revenue) only; it ignores margins and cost structure.
– EV/EBITDA incorporates operating performance (earnings before interest, taxes, depreciation and amortization), so it reflects cash‑generation ability more directly.
– Use EV/R when companies have negative or unreliable operating income; use EV/EBITDA when operating metrics are comparable and meaningful.
Real‑world example (retail snapshot, Aug 15, 2020)
– Walmart: EV ≈ $433.9 billion; revenue (TTM) ≈ $534.66 billion → EV/R ≈ 0.81
– Target: EV ≈ $79.33 billion; revenue ≈ $80.1 billion → EV/R ≈ 0.99
– Big Lots: EV ≈ $3.36 billion; revenue ≈ $5.47 billion → EV/R ≈ 0.61
(Values per cited sources: Yahoo! Finance pages for each company; dates and figures reflect those sources at the time cited.)
Limitations and common pitfalls
– Ignores profitability: Two companies with identical revenue may have vastly different profit margins and capital requirements.
– Capital intensity and capex: EV/R does not reflect capex needs; high capex industries may deserve lower multiples.
– Growth differences: High‑growth firms justify higher EV/R; low or negative growth firms typically trade lower.
– Accounting differences: Revenue recognition policies and one‑time revenue items can distort comparisons.
– Seasonality and timing: Using inconsistent periods (TTM vs fiscal year) can mislead; seasonally concentrated businesses need careful period selection.
– Net debt nuances: Off‑balance sheet items, leases, pension deficits, or tax assets can materially affect EV.
– Cross‑industry comparisons are misleading: Always compare within narrow industry groups and similar business models.
Practical tips and best practices
– Always compare apples to apples: same revenue basis, same currency, similar business models and geographies.
– Use multiple multiples: Combine EV/R with EV/EBITDA, P/E (when positive earnings exist), and DCF analysis for a fuller view.
– Adjust revenue for nonrecurring items and normalize for seasonality or recent acquisitions/divestitures.
– For acquisition pricing, include transaction premiums, synergies, and integration costs beyond the simple multiple analysis.
– When in doubt, prefer EV/EBITDA or free‑cash‑flow metrics for mature, profitable businesses.
Further reading and sources
– Investopedia: “Enterprise Value‑to‑Revenue Multiple (EV/R)” by Julie Bang (source material for definitions and examples).
– Company statistics (example figures used): Yahoo! Finance pages for Walmart, Target and Big Lots.
If you want, I can:
– Build an Excel template (with formulas) to calculate EV, EV/R and implied equity value from peer multiples.
– Pull current EV and revenue for up to 5 tickers and compute EV/R with comparisons.
– Show how to convert a peer‑median EV/R into an implied per‑share price for a target company. Which would you prefer?