EV to Sales Calculator – Enterprise Value to Sales
The helpful EV to sales calculator helps you calculate the enterprise value to sales valuation ratio, which is highly useful when analyzing companies that are EBITDA negative or earnings negative. In this article, we will not only cover what the EV to sales ratio is and how to calculate it but also explore real-life examples and the most common investor questions.
What is the EV to sales ratio?
It is a valuation method that indicates how much the company acquisition cost is relative to its sales.
When a potential parent company (A) wants to acquire another one (B), it must first consider the current market price of B shares and the total amount of shares. That is also known as market capitalization.
Once A has bought all B shares, it is now responsible for B's outstanding debt and has the right over its cash and cash equivalents. Such cash is supposed to be spent to pay the debt at the acquisition time. Consequently, the acquisition cost is the sum of the market cap, the total debt minus the cash.
Since debt and cash affect the enterprise value, EV to sales multiple help investors to uncover hidden information that is not visible with the price multiples we discussed in the price to book ratio calculator or price to cash flow ratio calculator.
Furthermore, EV to sales ratio is different from price to sales ratio because, in the former, you compare enterprise value and not only market cap or price like the latter one. This difference is highly important for companies with appropriate amounts of debt or cash in their balance sheet.
How to calculate EV to sales? – Formula
Let's start checking what the formula for the enterprise value to sales ratio is:
First, we need to calculate the enterprise value (see the enterprise value calculator for details):
EV = mkt_cap + tot_debt - cash_eq + pref_shares + minor_int
EV– Enterprise value;
tot_debt– Total debt;
cash_eq– Cash and cash equivalents;
pref_shares– Preferred shares; and
minor_int– Minority interest;
You can get total debt from the company's balance sheet; and market capitalization from Google or stock screeners.
Second, we extract yearly sales (or revenue) from the income statement. Remember, if you are not checking fiscal year reports, you would have to build the trailing twelve months revenue value.
We use the EV to sales (enterprise value to sales ratio) formula:
EV to sales = Enterprise value / Sales
How to use the EV to sales calculator?
You just need to follow a few steps to unleash all the power of our EV to sales calculator:
Add the company market capitalization, the total debt, the cash & cash equivalents, the preferred shares, and the minority interest.
If your press the
Advanced modeoption button, you will get the last two variables and a help text if you hover the mouse/cursor over them.
Add revenue/sales value. Remember, it has to be the fiscal year value or the trailing twelve-month revenue value.
Our EV to sales calculator will give you the result.
How to calculate EV to sales? – Real life example
Let's calculate the EV to sales ratio of UiPath, a public company in the robotic process automation sector. Considering the last available information for today (November 22nd, 2021), we have:
Revenues TTM = 736 millions USD
Market cap (November 22nd, 2021) = 25,112 millions USD
Total debt = 26.25 millions USD
Cash and cash equivalents = 1,826 millions USD
So, what is the enterprise value of UiPath?
EV = 25,112 + 18.85 - 1,826 = 23,304 millions USD
EV to sales = 31.66
So we can say that currently, the stock price is trading at 31 times EV to sales, which would be considered overvalued by several stock market strategists. However, let me tell you that a few months ago, this stock was trading at 85 USD per share, which, compared to the current stock price (48.9 USD), returns a maximum drawdown of -42.5%. Wild loses, eh?
So let's get the EV to sales value for the time when the stock was trading at 85 USD:
Revenues TTM = 680.76 millions USD
Market cap (May 24th, 2021) = 42,570 millions USD
Total debt = 19.22 millions USD
Cash and cash equivalents = 1,879 millions USD
EV = 42,570 + 19.22 - 1,879 = 40717.77 millions USD
EV to sales = 59.8
In conclusion, valuation does matter. Another common valuation tool we have is the EBITDA multiple and the price earnings ratio. Still, when companies have negative EBITDA or earnings per share, there is no other option than using the EV to sales ratio.
Finally, when deciding to invest in stocks with EV to sales over 20, it is imperative to review its gross margin. It is critical. A company with an expensive valuation will never sustain its multiple if new competitors start to take market share from it. A way to verify that you have invested in the best company is by checking if it has the most significant gross margin among its peers and, of course, if it can sustain it.
What is a good EV to sales ratio?
Usually, an EV to sales under ten is considered safe, but what is most important here is how my company is valued relative to the other public companies in its sector. If your company has an EV to sales of 8 and the industry average is trading at three times enterprise value to sales, then you have a clearly overpriced stock. Still, that does not mean it's a bad stock.
When to use EV to sales ratio?
There are three specific situations when we can use sales multiples:
- The company is not profitable: Negative net income. Thus, it is not possible to use price to earnings ratio.
- The company is not EBITDA profitable: Negative EBITDA. Consequently, it is not possible to use EV / EBITDA multiple.
- The company does not generate positive operating or positive free cash flow. Then, we cannot use price to cash flow.
What does a negative enterprise value mean?
It can only mean that the company's cash and cash equivalents are so big relative to the market cap and total debt that it makes the enterprise value negative. This is not necessarily bad. It is like you would be being paid for acquiring that company. Crazy, eh? We recommend a complete financial analysis to determine the reason for the low valuation.
How do I calculate enterprise value?
A complete enterprise value calculation sums the company's market cap, total debt, preferred shares value, minority interests and subtracts the cash and cash equivalents.
What is the enterprise value?
The enterprise value is considered to be the acquisition cost of a company. It includes the equity value of a company and its debt and takes into account the amount of cash the company already has. Investors and analysts base their valuation models on it.