Valuation
EV/Sales
EV/Sales prices the whole firm against revenue when earnings are thin or negative.
Young companies and cyclical troughs often have no useful P/E. Revenue still exists. EV/Sales tells you how many dollars of firm value sit on each dollar of sales. It is common in software, biotech, and any turnaround where profit is the debate and sales are the fact.
A low multiple is only attractive if the sales can eventually earn a margin. Ten times sales on a business with 2% net margins is a very long wait. Read EV/Sales next to gross margin and the path to free cash flow, not as a standalone bargain signal.
Formula
EV/Sales = Enterprise value ÷ trailing revenue
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. Use the market cap as the equity piece of enterprise value. Add debt and subtract cash from the balance sheet before you trust an EV multiple.
Related
EV/EBITDA · Revenue · Enterprise Value
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Questions
When is EV/Sales better than P/E?
When earnings are negative, distorted, or about to change shape, and revenue is the stable number.
Should I use market cap or enterprise value?
Enterprise value, if you can. Market cap / sales ignores debt and cash and flatters leveraged firms.