======ev_sales======
The [[EV/Sales Ratio]] (also known as the '[[Enterprise Value to Sales Multiple]]' or EV/S) is a valuation metric that helps you figure out how much you're paying for a company's sales. Think of it as a price tag, but for the entire business, not just its stock. It answers the question: "For every dollar of sales the company generates, how many dollars am I paying if I were to buy the whole company, including its debt?" Unlike its more famous cousin, the [[P/S Ratio]], the EV/Sales ratio includes a company's debt in its calculation. This makes it a more comprehensive and, for a value investor, often more honest measure of value. It's especially handy for analyzing companies that aren't profitable yet, like young tech firms or businesses in a temporary slump, because every company has sales, but not every company has earnings.
===== How It Works =====
At its core, the ratio is a simple division: [[Enterprise Value (EV)]] / [[Sales]]. But the magic is in understanding the two components.
==== The Formula Breakdown ====
  * **Enterprise Value (EV):** This is the company's total price tag. It's a more holistic value than just [[market capitalization]] because it considers both the good (cash) and the bad (debt). The formula is:
  **EV = Market Capitalization + Total Debt - Cash & Cash Equivalents**
  By including debt, EV tells you what it would //really// cost to acquire the entire business. An acquirer would have to pay off the company's debt but would also get to keep its cash.
  * **Sales (or Revenue):** This is the top line of the income statement. It's the total money a company brings in from its business activities over a period, usually the last twelve months ([[TTM]]), before any costs or expenses are deducted.
Let's imagine a company, "Cycle Corp," which is in a cyclical industry. It has a market cap of $100 million, $30 million in debt, and $10 million in cash. Its annual sales are $80 million.
Its EV would be: $100m + $30m - $10m = $120 million.
Its EV/Sales ratio would be: $120m / $80m = 1.5x. This means you are paying $1.50 for every $1 of Cycle Corp's annual sales.
===== Why Bother with EV/Sales? =====
For the disciplined investor, the EV/Sales ratio is a powerful tool in the valuation toolkit, offering several advantages over metrics that rely on earnings.
==== The Value Investor's Perspective ====
A key tenet of value investing is to look past the superficial numbers and understand the true underlying business. EV/Sales helps you do just that.
  * **Immunity to Accounting Games:** Sales figures are generally much harder for a company's management to manipulate than [[Net Income]]. Earnings can be influenced by depreciation methods, one-off charges, and other accounting choices. Sales are a more straightforward measure of business activity.
  * **Valuing the Unprofitable:** What if you're looking at a great business going through a rough patch? Or a young, high-growth company reinvesting every penny and not yet showing a profit? Earnings-based metrics like the [[P/E Ratio]] are useless here. EV/Sales allows you to value the business based on its ability to generate revenue, which is the first step toward future profitability.
  * **The All-Important Debt Factor:** This is the ratio's killer feature. Two companies might have the same P/S ratio, making them look equally cheap. But if one is drowning in debt, it's a much riskier proposition. The EV/Sales ratio captures this risk by including debt in its numerator. It prevents you from falling for a company that looks cheap on the surface but is actually a "debt bomb" waiting to go off. This aligns perfectly with the conservative principles of legends like [[Benjamin Graham]].
==== When to Be Cautious ====
While powerful, the EV/Sales ratio isn't a silver bullet. As [[Warren Buffett]] might say, it's better to be approximately right than precisely wrong.
  * **It Ignores Profitability:** A low EV/Sales ratio is attractive, but it means nothing if the company can't ever turn those sales into profits. A business can be a "revenue-generating, cash-burning machine." You must always ask: //can this company eventually achieve healthy profit margins on these sales?//
  * **It's Industry-Specific:** Comparing the EV/Sales of a software company to a supermarket is like comparing apples and oranges. A high-margin [[SaaS]] business might trade at 10x sales, while a low-margin grocery chain might trade at 0.5x sales. Both could be fairly valued. The ratio is only useful when comparing a company to its direct competitors and its own historical range.
===== Putting EV/Sales into Practice =====
To use the EV/Sales ratio effectively, you need context. It's a starting point for investigation, not a final answer.
==== A Practical Checklist ====
When analyzing a company's EV/Sales ratio, run through these simple steps:
  * **Compare with Peers:** How does the company's EV/Sales stack up against its closest competitors? A significant discount might signal an undervalued opportunity, while a premium suggests high market expectations you need to verify.
  * **Look at Historical Trends:** What is the company's average EV/Sales ratio over the last 5 or 10 years? If the current ratio is well below its historical average, it could be a sign that the stock is on sale, provided the business fundamentals haven't deteriorated.
  * **Combine with Other Metrics:** //Never// use EV/Sales in isolation. It tells you about price, but not about quality. Pair it with profitability metrics like [[Gross Margin]] and [[Operating Margin]] and cash flow metrics like [[Free Cash Flow (FCF)]]. The holy grail for a value investor is finding a company with a low EV/Sales ratio //and// improving margins. That's a sign that the market is mispricing the company's future earning power.