Unlocking Business Insights: Understanding the Enterprise Value-to-Revenue (EV/R) Multiple
Key Insights
- Simplified Value Measurement: Compares a company’s enterprise value to its revenue to determine stock value.
- Valuation for Acquisitions: Crucial metric for evaluating company worth during potential acquisitions.
- Inclusive of All Companies: Effective even for firms that are not generating profits yet.
What is the Enterprise Value-to-Revenue (EV/R) Multiple?
The enterprise value-to-revenue multiple (EV/R) is a financial measurement used to identify if a stock is fairly priced by comparing the entire enterprise value of a company to its revenue. It is also applied in determining valuations, especially in acquisition scenarios, by presenting a uniform metric that includes both equity and debt. Known alternatively as the enterprise value-to-sales multiple, it’s a key indicator for understanding market value.
How to Calculate the Enterprise Value-to-Revenue Multiple (EV/R)
To derive the EV/R multiple, divide a company’s enterprise value by its revenue. The formula is:
EV/R = Enterprise Value / Revenue
Where:
- Enterprise Value (EV) = Market Capitalization (MC) + Debt (D) - Cash and Cash Equivalents (CC)
You can also use an extended calculation for enterprise value, where more variables are included.
Example Application of EV/R
Imagine a company with the following financials:
- Short-term liabilities: $20 million
- Long-term liabilities: $30 million
- Total assets: $125 million
- Cash: $12.5 million (10% of assets)
- Common stock: 10 million shares
- Stock price per share: $17.50
- Annual revenue: $85 million
Calculate the enterprise value (EV):
EV = (10,000,000 shares * $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, find the EV/R:
EV/R = $212,500,000 / $85,000,000 = 2.5
Industry Example: Retail Giants EV/R Comparison
Looking at retail giants such as Walmart, Target, and Big Lots can provide a clear practical application of the EV/R multiple.
- Walmart (NYSE: WMT): Enterprise Value: $433.9 billion, Revenue: $534.66 billion
- EV/R = 0.81
- Target (NYSE: TGT): Enterprise Value: $79.33 billion, Revenue: $80.1 billion
- EV/R = 0.99
- Big Lots (NYSE: BIG): Enterprise Value: $3.36 billion, Revenue: $5.47 billion
- EV/R = 0.61
Comparing EV/R with EV/EBITDA
EV/R differs from the EV-to-EBITDA multiple as it doesn’t consider operating expenses and focuses solely on revenue. EV/EBITDA, on the other hand, takes into account the firm’s capability to produce operating cash flows. However, EV/R is beneficial for evaluating companies yet to attain profitability, such as start-ups.
Know Its Limits
While an integral figure, the EV/R multiple must be used for comparative analysis among competitors in the same sector. It’s not as readily available as some other financial metrics and requires thorough calculation steps, sometimes incorporating additional variables.
Understanding the strengths and limitations of the EV/R will empower smarter investment decisions. Accurately leveraging this insight will provide a clearer picture of a company’s relative value.
Related Terms: enterprise value, market capitalization, stock valuation, revenue multiple, EV/EBITDA
References
- Yahoo! Finance. “Walmart Inc. Statistics”.
- Yahoo! Finance. “Target Corporation Statistics”.
- Yahoo! Finance. “Big Lots Inc. Statistics”.
