# What Is Enterprise Value-to-Sales (EV/Sales)? How to Calculate

![Enterprise Value-to-Sales (EV/Sales)](https://www.investopedia.com/thmb/rmJf4CC8igruZkeDTCFRj8cHSZU=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Enterprise-value-sales-4197048-FINAL-a98faa4f5e4b40bfa58dd1bd16640386.png)

*— Investopedia / Madelyn Goodnight*

> **Definition**
>
> A company's enterprise value-to-sales (EV/Sales) ratio indicates whether its stock is overpriced or underpriced by comparing its potential takeover value to its recent sales numbers.

## What Is Enterprise Value-to-Sales (EV/Sales)?

Enterprise value-to-sales (EV/sales) is a ratio that compares the [enterprise value](https://www.investopedia.com/terms/e/enterprisevalue.asp) (EV) of a company to its annual sales. That is, it compares the company's potential takeover price to its total sales for the year.

The EV/sales multiple gives investors one way to determine whether a company's stock is overvalued or undervalued. A lower multiple suggests that the company's stock may be cheaper than its financial performance suggests it should be.

### Key Takeaways

*   Enterprise value is the amount of money that a company might be worth if it was purchased outright, based on its equity and debt.
*   The EV/Sales ratio compares its potential enterprise value to its real annual sales total.
*   The ratio is usually between x1 and x3, with a lower number indicating that the company's stock may be undervalued by the market.

## The Formula for Enterprise Value-to-Sales

﻿ $\begin{aligned} &\text{EV/Sales} = \frac{ \text{MC} + \text{D} - \text{CC} }{ \text{Annual Sales} } \\ &\textbf{where:}\\ &\text{MC} = \text{Market capitalization} \\ &\text{D} = \text{Debt} \\ &\text{CC} = \text{Cash and cash equivalents} \\ \end{aligned}$﻿

## How to Calculate Enterprise Value-to-Sales

Enterprise value-to-sales is calculated by:

1.  Adding total debt to a company’s market cap
2.  Subtracting out cash and cash equivalents
3.  And then dividing the result by the company’s annual sales

A slightly more complicated version of enterprise value with a few more variables is sometimes used. The more complex formula for EV is:

﻿ $\begin{aligned} &\text{EV} = \text{MC} + \text{D} + \text{PS} + \text{MI} - \text{CC} \\ &\textbf{where:}\\ &\text{PS} = \text{Preferred shares} \\ &\text{MI} = \text{Minority interest} \\ \end{aligned}$﻿

## What Does Enterprise Value-to-Sales Tell You?

Enterprise value-to-sales is an expansion of the [price-to-sales](https://www.investopedia.com/terms/p/price-to-salesratio.asp) (P/S) valuation, the latter of which uses market capitalization instead of enterprise value. EV/Sales is perceived to be more accurate than P/S, in part, because the [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) alone does not take a company's debt into account when valuing the company, while enterprise value does.

EV-to-sales multiples are usually found to be between 1x and 3x. Generally, a lower EV/sales multiple will indicate that a company may be more attractive or undervalued in the market. The EV/sales measure can also be negative when the cash balance of the company is greater than the market capitalization and debt structure, signaling that the company can essentially be bought with its own cash.

The EV-to-sales measure can, however, be slightly deceptive in that a higher multiple is not always a signal of over-valuation. A high EV-to-sales can be a positive sign that investors believe that future sales will greatly increase. A lower EV-to-sales can likewise signal that future sales prospects are not very attractive.

To make the most out of this metric, compare the EV-to-sales to that of other companies in the same industry, and look deeper into the company you are analyzing.

## Example of How to Use Enterprise Value-to-Sales

Assume that a company reports sales for the year of $70 million. The company has $10 million of [short-term liabilities](https://www.investopedia.com/terms/s/shorttermdebt.asp) on the books and $25 million of [long-term liabilities](https://www.investopedia.com/terms/l/longtermliabilities.asp). It has $90 million worth of assets, with 20% of that in cash. Lastly, the company has 5 million shares of [common stock outstanding](https://www.investopedia.com/terms/o/outstandingshares.asp) and the current price of the stock is $25 per share. Using this scenario, the company's enterprise value is:

$\begin{aligned} \text{EV} &= \text{Market Cap (5 Million Shares} \times \text{\$25 Stock Price)} \\ &\quad + \text{Total Debt (\$10 Million} + \text{\$25 Million)} \\ &\quad - \text{Cash (\$90 Million} \times 20\%) \\ &= \$125 \text{ Million} + \$35 \text{ Million} - \$18 \text{ Million} \\ &= \$142 \text{ Million} \end{aligned}$

Next, to find the EV-to-sales, simply divide the calculated enterprise value by sales. In this example, the EV-to-sales is:

$\begin{aligned} &\text{EV/Sales} = \frac{ \$142 \text{ Million} }{ \$70 \text{ Million} } = 2.03 \\ \end{aligned}$

Taking the EV/sales ratio a step further, consider Coca-Cola. The company has a market cap of $237 billion as of Dec. 31, 2019.

*   Its total debt as of Dec. 31, 2019, was $42.8 billion.
*   Cash and cash equivalents are $6.5 billion as of Dec. 31, 2019.
*   Sales over the [trailing 12 months](https://www.investopedia.com/terms/t/ttm.asp) for Coca-Cola have been $37.2 billion. 
*   EV for Coca-Cola is $273.3 billion, or $237 billion + $42.8 billion - $6.5 billion.

> EV/sales = 7.3x, or $273.3 billion / $37.2 billion.
> 
> ## Enterprise Value-to-Sales vs. Price-to-Sales
> 
> The EV-to-sales ratio takes into account the debt and cash a company has. The price-to-sales ratio, meanwhile, does not. The price-to-sales ratio is quicker to calculate, using only a company’s market cap as the numerator. However, debtholders do have a claim on sales and should theoretically be included in the valuation.
> 
> ## Limitations of Using Enterprise Value-to-Sales
> 
> The EV/sales ratio requires calculating the enterprise value, which involves a little more digging into financial statements. EV is generally used for valuing acquisitions, where the acquirer will assume the debt of the company, but also get the cash. Another limitation to be aware of is that sales do not take into account a company’s expenses or taxes.