Enterprise-Value-To-Sales - EV/Sales
A valuation measure that compares the enterprise value of a company (computed as the market capitalization plus debt and preferred shares less cash and cash equivalents) to the company's sales. EV/sales gives investors an idea of how much it costs to buy the company's sales. This measure is an expansion of the price-to-sales valuation, which uses market capitalization instead of enterprise value. EV/sales is seen as more accurate because market capitalization does not take into account as well as enterprise value the amount of debt a company has, which needs to be paid back at some point. Generally the lower the EV/sales the more attractive or undervalued the company is seen.
Investopedia Commentary
The EV/sales measure can be negative when the cash in the company is more than the market capitalization and debt structure, signaling that the company can essentially be bought with its own cash.
The EV/sales measure can be slightly deceiving: a high EV/Sales is not always a bad thing as it can be a sign that investors believe the future sales will greatly increase. And a lower EV/sales can signal that the future sales prospects are not very attractive. It is important to compare the measure to that of other companies in the industry, and look deeper into the company you are analyzing.
Related Links
EV Gets Into Gear
Ratio Analysis Tutorial
Relative Valuation: Don't Get Trapped
Introduction to Fundamental Analysis
See also: Cash and Cash Equivalents - CCE, Debt, Enterprise Value - EV, Fundamental Analysis, Market Capitalization, Net Sales, Preferred Stock, Price-to-Sales Ratio (Price/Sales)
Also spelled: EV-to-Sales