EV/EBITDA vs EV/sales
EV/EBITDA and EV/sales share enterprise value. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, EV is $130,000,000: 13 times $10,000,000 of EBITDA, and 2 times $65,000,000 of sales.
| EV/EBITDA | EV/sales | |
|---|---|---|
| Formula | Enterprise value / EBITDA. | Enterprise value / sales. |
| Teaching sheet | $130,000,000 / $10,000,000 = 13 times. | $130,000,000 / $65,000,000 = 2 times. |
| When the year fattens | Hold EV at $130,000,000, raise EBITDA to $13,000,000: the multiple falls to 10 times. | Hold EV at $130,000,000, raise sales to $130,000,000: the multiple falls to 1 times. |
| No surplus cash | EV becomes $140,000,000. Against $10,000,000 of EBITDA that is 14 times. | The same $140,000,000 against $70,000,000 of sales is still 2 times. |
| What it is not | A P/E, or cash. EBITDA has not paid tax, capex or working capital. | A P/S. P/S puts equity over sales. EV/sales puts the operations over sales. |
On this page
One enterprise value, two flows
Enterprise value is equity plus debt minus cash. On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, EV is $130,000,000 and net debt is $30,000,000.
EV/EBITDA divides that stock by EBITDA. $130,000,000 / $10,000,000 is 13 times. EV/sales divides the same stock by a year's sales. $130,000,000 / $65,000,000 is 2 times. How EV/EBITDA works owns the 13. How EV/sales works owns the 2. How enterprise value works owns .
A gap between 13 times and 2 times is the margin sitting between sales and EBITDA, not a trading signal.
A cheaper multiple can be a fatter year
Hold equity, debt and cash still, so EV stays $130,000,000. Raise EBITDA to $13,000,000 and sales to $130,000,000. EV/EBITDA falls to 10 times. EV/sales falls to 1 times. The identity did not move. Both denominators did.
Zero out the cash and EV becomes $140,000,000. Against $10,000,000 of EBITDA that is 14 times. Against $70,000,000 of sales that is 2 times. The $10,000,000 of surplus cash on the first sheet had been subtracted in full.
Enterprise value against equity value is the stock split. This is educational material, not financial advice.
Worked examples
13 times and 2 times on the teaching sheet
Equity is $100,000,000, interest-bearing debt is $40,000,000, surplus cash is $10,000,000, EBITDA is $10,000,000, and sales are $65,000,000. What are EV/EBITDA and EV/sales?
- Net debt is debt minus cash: , so $30,000,000.
- Enterprise value is equity plus net debt: , so $130,000,000.
- EV/EBITDA is .
- EV/sales is .
Enterprise value is $130,000,000. Net debt is $30,000,000. EV/EBITDA is 13 times. EV/sales is 2 times.
10 times and 1 times on a fatter year
Keep equity at $100,000,000, debt at $40,000,000 and cash at $10,000,000, so enterprise value is still $130,000,000. EBITDA is now $13,000,000 and sales are $130,000,000. What are the multiples?
- Enterprise value does not move: it is a stock identity. It stays $130,000,000.
- EV/EBITDA is .
- EV/sales is .
The multiples are 10 times EBITDA and 1 times sales. Enterprise value is still $130,000,000. The identity did not change. Both denominators did.
14 times and 2 times with no surplus cash
Keep equity at $100,000,000 and debt at $40,000,000. Cash is now $0. EBITDA is $10,000,000 and sales are $70,000,000. What are the multiples?
- Net debt is the full $40,000,000, because nothing is subtracted.
- Enterprise value is , so $140,000,000.
- EV/EBITDA is .
- EV/sales is .
Enterprise value is $140,000,000. EV/EBITDA is 14 times. EV/sales is 2 times.
Common questions
Why do the two multiples share a numerator?
Because both price the operations. On the first sheet that stock is $130,000,000. EBITDA and sales are two different flows under it.
Is 13 times cheap and 2 times cheap?
They are $130,000,000 over two different denominators on a teaching sheet. Whether either is cheap depends on margin, growth, capex and the sector. The numbers are ratios, not a verdict.
Why not compare EV/sales to a P/S?
Because they are different fractions. EV has debt in the numerator. P/S has equity in the numerator. The gap is net debt, not a finding about cheapness.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.