What Is the Enterprise Value-to-Revenue Multiple (♑EV/R)?

The enterprise value-to-revenue multiple (EV/R) is a measure of the value of a stock that compares a company's enterprise value to its revenue. EV/R is one of several fundamental indicators that investors use to determine whether a stock is priced fairly. The EV/R multiple is also often used to determine a company's valuation in the case of a potential acquisition. It’s also called the 澳洲幸运5官方开奖结果体彩网:enterprise value-to-sales multiple.

Understanding ♏Enterprise Valueꩲ-to-Revenue Multiple (EV/R)

The enterprise value-to-revenue (EV/R) multiple helps compare a company’s revenues to its enterprise value. The lower the better, in that, a lowe🌸r EV/R multiple signals a co💙mpany is undervalued.

Generally used as a valuation multiple, the EV/R is often used during acquisitions. An acquirer will use the EV/R multiple to determine an appropriate fair value. The enterprise value is used because it adds debt and takes out ca❀sh, which an acquirer would take on and receive, respectively.

How to Calculate En𝓰t༺erprise-Value-to-Revenue Multiple (EV/R)

The enterprise value-to-revenue (EV/R) is easily calculated by taking the 澳洲幸运5官方开奖结果体彩网:enterprise value of the company and di♍viding it by the company's revenue.

 $\begin{aligned} &\text{EV/R} = \frac{ \text{Enterprise Value} }{ \text{Revenue} } \\ &\textbf{where:}\\ &\text{Enterprise Value} = \text{MC} + \text{D} - \text{CC} \\ &\text{MC} = \text{Market capitalization} \\ &\text{D} = \text{Debt} \\ &\text{CC} = \text{Cash and cash equivalents} \\ \end{aligned}$​EV/R=RevenueEnterprise Value​where:Enterprise Value=MC+D−CCMC=Market capitalizationD=DebtCC=Cash and cash equivalents​

Example of How to Use Enterprise Value-to-Revenue Mult𒉰iple (EV/R)

Say a company has $20 million in short-term liabilities on the books and $30 million in long-term liabilities. It has $125 million worth of assets, and 10% of those assets are reported as cash. There are 10 million shares of the company's common stock outstanding, and the current price per share of the stock is $17.50. The company reported $85 million in revenue last year.

Using 🐷this scenario, 🌳the enterprise value of the company is:

 $\begin{aligned} \text{Enterprise Value} &= (\$10,000,000 \times \$17.50) \\ &\quad + (\$20,000,000 + \$30,000,000) \\ &\quad - (\$125,000,000 \times 0.1) \\ &= \$175,000,000 + \$50,000,000 \\ &\quad - \$12,500,000 \\ &= \$212,500,000 \\ \end{aligned}$Enterprise Value​=($10,000,000×$17.50)+($20,000,000+$30,000,000)−($125,000,000×0.1)=$175,000,000+$50,000,000−$12,500,000=$212,500,000​

Next, to find꧅ the EV/R, simply take the EV andꦦ divide it by the revenue for the year:

 $\begin{aligned} \text{EV/R} &= \frac{ \$212,500,000 }{ \$85,000,000 }\\ &= 2.5 \\ \end{aligned}$EV/R​=$85,000,000$212,500,000​=2.5​

Enterprise value can be calculated using a slightly more complicated formula that includes a few more variables. Some analy🌠sts prefer this method over the more simplified version. The version of enterprise value with added terms is:

 $\begin{aligned} &\text{Enterprise Value} = \text{MC} + \text{D} + \text{PSC} + \text{MI} - \text{CC} \\ &\textbf{where:}\\ &\text{PSC} = \text{Preferred shared capital} \\ &\text{MI} = \text{Minority interest }\\ \end{aligned}$​Enterprise Value=MC+D+PSC+MI−CCwhere:PSC=Preferred shared capitalMI=Minority interest ​

As a real-life example, consider the major retail sector, notably Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and Big Lots (NYSE: BIG). The enterprise values of Wal-Mart, Target, and Big Lots are $433.9 billion, $79.33 billion, and $3.36 billion, respectively, as of Aug. 15, 2020.

Meanwhile, the three have revenues over the 澳洲幸运5官方开奖结果体彩网:trailing 12 months of $534.66 billion, $80.1 billion, and $5.47 billion, respectively. Dividing each of their enterprise values by revenues means Wal-Mart’s EV/R is 0.81, Target’s is 0.99, and Big Lots’ is 0.61.

The Difference Between Enterprise Value-to-Revenue Multiple (EV/R) and Enterprise Value-to-EBITDAꦚ (EV/EBITDA)

The enterprise value-to-revenue (EV/R) looks at a companies revenue-generating ability, while the enterprise value-to-EBITDA (EV/EBITDA)—also known as the 澳洲幸运5官方开奖结果体彩网:enterprise multiple—looks at a company’sဣ ability to generate operating cash flows.

EV/EBITDA takes ♏into account operating expenses, while EV/R looks at just the top line. The advantage that EV/R has is that it can be used for companies that are yet to generate income or profits, such as the case with Amazon (AMZN) in its early days.

Lim🌸itations of Using Enterprise Value-to-Revenue Mul🍸tiple (EV/R)

The enterprise value-to-revenue multiple should be used to compare companies in the same industry, and as a benchmark of the ratio from best in breed in the industry to know whether ജthe ratio represents a good performance or poor one.

Also, unlike market cap, which is readily available on the likes of Yahoo! Finance, the EV/R multiple requires calculating the enterprise value. This requires adding the debt and subt꧋racting out the cash and could involve additional factors if using the expanded version.