How EV/sales works

EV/sales is enterprise value divided by sales. The numerator is a stock: the value of the operations. The denominator is a flow: a year's revenue.

$$\text{EV/sales} = \frac{E + D - C}{\text{Sales}}$$

On $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of surplus cash, enterprise value is $130,000,000. Net debt is $30,000,000. Against $65,000,000 of sales the multiple is 2.

The EV/sales calculator on this page is both the identity and the ratio. How enterprise value works owns $E + D - C$. This page owns the division by sales.

EV/EBITDA against EV/sales is the same numerator over two different flows. This page is the sales flow. Do not paste an EBITDA line from the cousin sheet onto this sales denominator.

Back to $100,000,000 of equity, $40,000,000 of debt and $10,000,000 of cash, so enterprise value is still $130,000,000. Sales are now $130,000,000. The multiple is 1 times.

The stock did not move. The flow did. A cheaper multiple here is a larger year of sales, not a cheaper firm. The first sheet's 2 times was the same $130,000,000 of EV on $65,000,000 of sales. Ranking those two sheets by EV/sales ranks the year of sales, not a change in what the operations cost.

Sorting a list by EV/sales low to high is a ranking of that ratio, not a bargain screen on its own. A distressed name can print a low EV/sales because the equity residual collapsed faster than trailing sales.

Keep equity at $100,000,000 and debt at $40,000,000. Cash is now $0. Enterprise value is $140,000,000. Net debt is the full $40,000,000. Against $70,000,000 of sales the multiple is 2 times.

The $10,000,000 of surplus cash on the first sheet had been subtracted in full. Putting it back raises EV by exactly that amount. Subtracting surplus cash is a claim that the cash is not an operating asset. If it cannot be taken out, do not subtract it, and live with the higher EV.

The multiple is still 2 times, matching the first sheet, on a larger EV and a larger sales year. Same ratio, different stock, different flow. How enterprise value works is why those two stocks are not interchangeable.

It is not EV/EBITDA. That cousin puts a profit-adjacent flow in the denominator. This page puts sales in. How EV/EBITDA works owns that other multiple. A gap between the two is the margin sitting between sales and EBITDA, not a trading signal.

It is not P/S. How price to sales works puts equity over sales. EV/sales puts the operations over sales. The gap is net debt.

It is not free cash flow. Sales have not paid cost of goods, tax, capex or working capital.

Enterprise value minus equity value is net debt. On the first sheet that is $30,000,000. A multiple on EV is a multiple on the operations. A multiple on equity is a multiple on what is left after that $30,000,000. How price to sales works is the equity-side sales multiple. The gap between those two fractions is this net-debt line, not a trading signal.

How net debt works is $D - C$. Enterprise value against equity value is the stock split this multiple sits on top of.

It is not a full net-debt build, not an EV/EBITDA engine, and not a claim that 2 times is cheap or dear. The three sheets are EV of $130,000,000 on $65,000,000 of sales (2 times), the same EV against $130,000,000 of sales (1 times), and EV of $140,000,000 with no surplus cash (2 times). This is educational material, not financial advice.