Enterprise-Value-to-Revenue Multiple – EV/R

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 enterprise value-to-sales multiple.

Understanding Enterprise Value-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 lower EV/R multiple signals a company 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 cash, which an acquirer would take on and receive, respectively.

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

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.

EV/R = Enterprise Value Revenue where: Enterprise Value = MC + D − CC MC = Market capitalization D = Debt CC = Cash and cash equivalents \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 Valuewhere:Enterprise Value=MC+D−CCMC=Market capitalizationD=DebtCC=Cash and cash equivalents

Example 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.

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

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 \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:

EV/R = $ 212 , 500 , 000 $ 85 , 000 , 000 = 2.5 \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:

Enterprise Value = MC + D + PSC + MI − CC where: PSC = Preferred shared capital MI = Minority interest  \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.

The Difference Between Enterprise Value-to-Revenue Multiple (EV/R) and Enterprise Value-to-EBITDA (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 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 are yet to generate income or profits, such as the case with Amazon (AMZN) in its early days.

Limitations of Using Enterprise Value-to-Revenue Multiple (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 the ratio represents a good performance or poor one.