EV/Sales

EV/Sales relates the full value of a company to all its providers of capital — shareholders and creditors together — to its annual revenue. The numerator is not market capitalisation but enterprise value, so the result does not depend on how the company has split its financing between equity and borrowings: a stock with heavy debt and a stock with no debt, at identical sales, are compared on equal terms. Where P/S is already distorted by differing debt loads, the multiple to revenue remains comparable.

How the numerator is built and what it implies

The path from the share price to enterprise value is described by the bridge from EV to market capitalisation: interest-bearing debt and debt-like liabilities are added to market capitalisation, and cash is subtracted. The denominator is taken for the most recent completed periods or for the forecast year — what matters is that the window is the same for the companies being compared.

Revenue by itself does not create value, so any multiple to it conceals an assumption about future margins. At equal sales, a business with a high gross margin is valued more highly, and this is not an anomaly but arithmetic: the same price of earnings produces a different price of revenue. Hence the rule for reading it — EV/Sales makes sense only within an industry with a similar cost structure, through the industry median, and only alongside a profitability measure.

An example using the platform's data

Retail is an industry where revenue is large and margins are thin, so the multiple to sales here is low by the nature of the business, not because it is cheap. Magnit's revenue stands at 103 000 000, while net debt, which enters the numerator in full, is 501 200 000 000. The current share price and market capitalisation, the second part of the numerator, are shown on the card:

As a cross-check, it is useful to keep the same issuer's earnings multiple alongside: 2,23. The gap between these two figures is explained by exactly one variable — the EBITDA margin.

Where the metric misleads

It is meaningless for banks and insurance companies: they have no revenue in the usual sense, and debt is their working raw material rather than a burden, so enterprise value is not defined for them. Such companies are valued through P/B.

The typical substitution is to read a low EV/Sales as cheapness. For a company with negative operating profitability, growth in sales increases the loss, and a cheap multiple to revenue turns out to be a description of a value trap, not of a discount. The second substitution is a comparison before and after a large acquisition: revenue jumps in a single step, so does the debt in the numerator, and the trend in the multiple stops saying anything about the business.