Enterprise-Value-to-Revenue (EV/R) Multiple

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

The enterprise value-to-revenue various (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 different is likewise frequently used to determine a company's valuation on account of an expected acquisition. It's additionally called the enterprise value-to-sales different.

Understanding Enterprise Value-to-Revenue Multiple (EV/R)

The enterprise value-to-revenue (EV/R) various assists compare a company's revenues to its enterprise with esteeming. The lower the better, in that, a lower EV/R different signs a company is undervalued.

Generally utilized as a valuation multiple, the EV/R is many times utilized during acquisitions. An acquirer will utilize the EV/R different to determine an appropriate fair value. The enterprise value is utilized in light of the fact that it adds debt and takes out cash, which an acquirer would take on and receive, respectively.

The most effective method to Calculate Enterprise-Value-to-Revenue Multiple (EV/R)

The enterprise value-to-revenue (EV/R) is effortlessly calculated by taking the enterprise value of the company and partitioning it by the company's revenue.
$\begin &\text{EV/R} = \frac{ \text }{ \text } \ &\textbf\ &\text = \text + \text - \text \ &\text = \text \ &\text = \text \ &\text = \text \ \end$

Illustration of How to Use Enterprise Value-to-Revenue Multiple (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.

Utilizing this scenario, the enterprise value of the company is:
$\begin \text &= ($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 \ &= $212,500,000 \ \end$
Then, to track down the EV/R, essentially take the EV and separation it by the revenue for the year:
$\begin \text{EV/R} &= \frac{ $212,500,000 }{ $85,000,000 }\ &= 2.5 \ \end$
Enterprise value can be calculated utilizing a somewhat more muddled formula that incorporates a couple of more variables. A few analysts prefer this method over the more simplified version. The version of enterprise value with added terms is:
$\begin &\text = \text + \text + \text + \text - \text \ &\textbf\ &\text = \text \ &\text = \text\ \end$
As a real-life model, consider the major retail sector, strikingly 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.

In the mean time, the three have revenues over the trailing 12 months of $534.66 billion, $80.1 billion, and $5.47 billion, respectively. Partitioning every one 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-EBITDA (EV/EBITDA)

The enterprise value-to-revenue (EV/R) takes a gander at a companies revenue-generating ability, while the enterprise value-to-EBITDA (EV/EBITDA) — otherwise called the enterprise multiple — takes a gander at a company's ability to generate operating cash flows.

EV/EBITDA considers operating expenses, while EV/R checks just the top line out. The advantage that EV/R has is that it very well may be utilized for companies that are yet to generate income or profits, like the case with Amazon (AMZN) in its early days.

Limitations of Using Enterprise Value-to-Revenue Multiple (EV/R)

The enterprise value-to-revenue various ought to be utilized to compare companies in a similar industry, and as a benchmark of the ratio from best in breed in the industry to know whether the ratio represents a decent performance or poor one.

Additionally, dissimilar to market cap, which is readily accessible on any semblance of Yahoo! Finance, the EV/R various requires working out the enterprise value. This requires adding the debt and subtracting out the cash and could include extra factors if utilizing the expanded version.

Features

• Frequently used to determine a company's valuation on account of a possible acquisition.
• A measure of the value of a stock that compares a company's enterprise value to its revenue.
• Can be utilized for companies that don't generate income or profits.