EV/Sales Ratio

The EV/Sales ratio divides enterprise value by total revenue. A company trading at 2.0x EV/Sales means investors are paying $2 for every $1 of annual sales. It is less sensitive to accounting choices than EV/EBITDA and useful for valuing unprofitable companies.

The intuition behind the ratio

Revenue is harder to manipulate than earnings. EV/Sales therefore provides a valuation check that bypasses profitability entirely, useful for unprofitable startups or mature low-margin businesses.

A company with negative earnings cannot be valued on EV/EBITDA or P/E. But it can be valued on EV/Sales. If comparable profitable companies in the industry trade at 2.0x EV/Sales, is a high-growth unprofitable competitor trading at 3.0x cheap or expensive? Depends on whether it reaches profitability.

How to calculate it

Enterprise value ÷ trailing twelve-month revenue.

Example: $50 billion EV ÷ $20 billion revenue = 2.5x EV/Sales.

When EV/Sales works well

Valuing unprofitable companies. Startups and turnarounds cannot be compared on EV/EBITDA. EV/Sales is the fallback.

Crossing into profitability. A company expecting to reach profitability can be valued on EV/Sales today. Once profitable, you switch to EV/EBITDA or P/E.

Mitigating accounting differences. Revenue is comparable across countries and accounting methods. EV/Sales sidesteps depreciation, reserves, and other distortions.

Comparing across industries. With caution, you can use EV/Sales to compare companies with very different profitability. It forces focus on scale.

When EV/Sales breaks down

Profitability is ignored. A 1% margin company and a 20% margin company can both trade at 2.0x EV/Sales, but they are not equivalent investments.

High growth can justify high multiples. A SaaS company trading at 10x EV/Sales is not necessarily expensive if it is growing 80% annually and headed toward 40% EBITDA margins.

It does not account for capital intensity. A capital-light SaaS company at 3.0x EV/Sales is cheaper than a capital-intensive business at the same multiple.

Working capital distorts it. A company with negative working capital (collecting before paying suppliers) can show inflated revenue relative to cash flow.

Using EV/Sales in practice

Start with EV/Sales, then verify with other metrics:

1. Calculate EV/Sales and compare to peers.
2. Examine profitability (margins). Are profits sustainable?
3. Check free cash flow. Can the company convert revenue to cash?
4. Assess growth. Justify the multiple by growth expectations.
5. For profitable companies, cross-check with EV/EBITDA and P/E.

See also