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» Stock market for beginner » Definition of Enterprise-Value-To-Sales - EV/Sales

A valuation measure that compares the enterprise value of an organization to the company's sales. EV/sales offers investors a thought of what proportion it costs to buy the company's sales. This measure is an growth of the price-to-sales valuation, which uses capitalization instead of enterprise value. EV/sales is seen as additional correct as a result of capitalization doesn't take into account likewise as enterprise value the amount of debt an organization has, which needs to be paid back at some point. typically the lower the EV/sales the additional enticing or undervalued the company is believed to be.

Let’s say Company A has 10 million shares outstanding and that they square measure mercantilism at $10 each. meaning the market cap is $100 million ($10 per share x 10 million shares).  Now, lets assume that Company A has $60 million in debt and $10 million in cash. net debt would be computed as $50 million (debt – cash).  To calculate enterprise value, we’d add along the market cap and net debt to get $150 million.  If Company A’s annual net sales square measure $100 million, then the EV/S ratio would be $150 million / $100 million, or 1.5 times. meaning that Company A’s enterprise value is 1.5 times its sales.

How to Use Enterprise value to Sales ratio (EV/S)

For example, if you are gazing an organization that creates smartphones, and it's mercantilism at a multiple of three times sales, however all the other firms that make smartphones exchange the 1-2 times range, then you'll gather that the company you are valuing is richly valued compared to the others.  If that's the case, then you must figure out why this company trades for over others.  Usually, meaning that the company is additional profitable, growing faster, has better products, features a additional favorable rate, lower production costs, or something that creates it trade for a premium.  If you can’t notice any other reason, then it would recommend that the investment you are consideration may not warrant consideration at this time.

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