Enterprise value-to-sales compares the enterprise value of a company to its annual sales. The EV/sales multiple gives investors a quantifiable metric of how to value a company based on its sales, while taking account of both the company's equity and debt.

This ratio can be used for spotting recovery situations or for checking that a growth stock has not become overvalued. It comes in handy when a company begins to suffer losses and, as a result, has no earnings with which investors can assess the shares.

Enterprise value-to-sales is an expansion of the price-to-sales valuation, which uses market capitalization instead of enterprise value. It is perceived to be more accurate than P/S because the market capitalization alone does not take a company's debt and cash into account when valuing the company, while enterprise value does.

We don’t recommend using EV ratios for financial companies, especially banks, because the nature of their balance sheet significantly distorts the enterprise value calculated with the standard definition.

Formula

EV2Sales = EV / Sales

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