Understanding the Enterprise Value-to-Revenue (EV/R) Multiple: A Comprehensive Guide

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

The enterprise value-to-revenue multiple (EV/R) is a powerful valuation tool for assessing company value by comparing enterprise value to revenue. It is calculated by dividing its enterprise value by its revenue. offering simplicity. This figure is useful when analyzing companies with minimal or no profits. It aids in potential acquisition scenarios and complements other financial metrics like EV/EBITDA. This is important when comparing companies within the same industry to gauge relative valuation.

EV/R is one of several fundamental indicators that investors use to determine whether a stock is over- or undervalued. 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 enterprise value-to-sales multiple.

Understanding the Enterprise Value-to-Revenue (EV/R) Ratio

The EV/R multiple shows how a company’s revenue compares to its enterprise value, with a lower EV/R suggesting the company might be undervalued.

The EV/R is commonly used during acquisitions to find a fair value. It considers enterprise value, which adds debt and subtracts cash, reflecting what an acquirer would assume and get.

How to Calculate the Enterprise Value-to-Revenue (EV/R) Ratio

The enterprise value-to-revenue (EV/R) is easily calculated by taking the enterprise value of the company and dividing 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​

Applying the Enterprise Value-to-Revenue (EV/R) Ratio: A Step-by-Step Example

Consider a company with $20 million in short-term liabilities and $30 million in long-term liabilities. With assets worth $125 million, 10% of which is cash, and 10 million shares priced at $17.50 each, 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 and 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 analysts 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 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.

EV/R vs. EV/EBITDA: Key Differences

The enterprise value-to-revenue (EV/R) looks at a company’s revenue-generating ability, while the enterprise value-to-EBITDA (EV/EBITDA)—also known as the enterprise multiple—looks at a company’s 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 have yet to generate income or profits, such as the case with Amazon (AMZN) in its early days.

Limitations of the EV/R Ratio

The enterprise value-to-revenue multiple should be used to compare similar companies and see if a company’s ratio indicates good or poor performance within its industry.

Market capitalization is easily found online, but calculating EV/EBITDA requires adding debt and subtracting cash from enterprise value. The expanded version may include more factors.

The Bottom Line

Enterprise Value-to-Revenue (EV/R) multiple is a fundamental tool for assessing company valuation, particularly useful for firms with minimal earnings. EV/R is used in acquisitions to determine fair market value, as it accounts for enterprise value by including debt and subtracting cash. While EV/R is effective for comparing revenue generation across companies, it should be paired with other metrics like EV/EBITDA for a comprehensive financial assessment.

EV/R is best utilized when comparing companies within the same industry to gauge relative valuation. EV/R’s limitations include its lack of consideration for operating expenses, necessitating the use of complementary financial metrics for complete valuation insights.

Investors and analysts should always employ EV/R in conjunction with other relevant metrics for a holistic view of company value.