EV/Sales compares enterprise value to revenue, providing a comprehensive revenue-based valuation that accounts for debt.
The EV/Sales ratio is similar to P/S ratio but uses enterprise value instead of market cap, making it more comprehensive by including debt. This makes it better for comparing companies with different capital structures. Like P/S, it's useful for valuing unprofitable companies and comparing businesses focused on revenue growth over immediate profitability.
A company with $11B enterprise value and $8B revenue has EV/Sales of 11 / 8 = 1.375x.
An EV/Sales above 5x indicates investors expect very high margins or rapid growth, typical of SaaS and high-margin tech companies.
An EV/Sales below 1x suggests undervaluation or concerns about profitability, common in low-margin industries.
Software companies often trade at 5-15x sales, while retailers may trade at 0.3-1.0x sales.
