Technicals Stability Returns



Understanding Enterprise Value to Revenue Ratio


Enterprise Value to Revenue Ratio compares enterprise value with the company's total revenue. It indicates how much it costs investors relative to per unit of sales the company generates. This valuation metric is also known as Enterprise Value to Sales Ratio.

A lower enterprise value-to-revenue ratio determines that the company's stock is undervalued, and the higher ratio determines that the companies' stock is overvalued. A slightly higher enterprise value to revenue ratio does not always show overvalued stocks. It could indicate that the company gives high sales in the future and low enterprise value to revenue indicates less attractive sales in the future.

The formula to derive Enterprise Value to Revenue Ratio

Enterprise Value to Revenue Ratio


Enterprise Value - It includes the market capitalization of the company, short-term and long-term debts, and any cash and cash equivalents. It is used to value a company. The formula to calculate Enterprise Value is (Market Capitalization + Debts - Cash and Cash Equivalents).

Total Revenue - It indicates how much a company's revenue is before deducting any expenses. Total revenue is found in the company's Income Statement.

Example of Enterprise Value to Revenue Ratio: Enterprise Value of the Oil Natural Gas Corporation (ONGC) is Rs. 319857.24 Cr. And for the financial year, total revenue was reported as Rs. 360572.31 Cr.
The value as per the formula (Enterprise Value / Total Revenue) is calculated as (319857.24 / 360572.31) = 0.89.


Key Highlights
Enterprise value-to-revenue is calculated by dividing Enterprise Value by Total Revenue.

Investors should look for a lower ratio below 3 or 4. It is generally considered good. A lower ratio indicates that the company is undervalued.

Many investors used this metric because the company's sales are not easy to manipulate.


While looking at the Enterprise Value to Revenue Ratio, the following points should also take into consideration:
The lower the EV/Revenue ratio, the better. It indicates that the company's stock is undervalued, and investors may get immediate benefits out of it.

The high ratio indicates that the company's stock is overvalued, and investors may not get immediate benefits out of it.

Enterprise value to revenue ratio is slightly difficult to measure because we don't get direct numbers to put in the formula.

It is more useful for companies with negative free cash flow or unprofitable companies. And also, if EBITDA and Net Profit are negative, then it is useless to use ratios like Enterprise Value by EBITDA ratio or PE ratio to value the company. In this situation, many investors used Enterprise Value to Revenue ratio.

This metric is considered more accurate than the Price to sales ratio because EV/Revenue takes debts into account while calculating, and P/S does not take debts into account.

It is also suitable for cyclic companies as Cyclic companies' are volatile and follow trends in the economy.


How to use Enterprise Value to Revenue Ratio effectively:
Investors should look for a lower ratio below 3 or 4. It is generally considered good. A lower ratio indicates that the company is undervalued.

Enterprise Value to Revenue Ratio is useful to value companies that are unprofitable or slightly profitable or are in their early-stage with high growth. For companies like this, it is useless to use metrics like EV/EBITDA ratio or P/E ratio.

Many investors used this metric because the company's sales are not easy to manipulate.

For better analysis, we must look at other financial metrics with Enterprise Value to Revenue Ratio like Enterprise Value by EBITDA, Market Capitalization to Sales, Cash Turnover Ratio, etc.,


Range Indicator of Enterprise Value to Revenue Ratio

Range Indicator Comments Screener at TSR
Below 1 Strong Bullish Extremely Undervalued Yes
1 to 2 Bullish Highly Undervalued Yes
2 to 3 Mild Bullish Undervalued Yes
3 to 4 Neutral Rightly Valued Yes
4 to 6 Mild Bearish Overvalued Yes
6 to 8 Bearish Highly Overvalued Yes
Above 8 Strong Bearish Extremely Overvalued Yes


Related Enterprise Value to Revenue Screener
Valuation Screener Enterprise Value to Revenue 0 To 4 Enterprise Value to Revenue 4 To 9 Enterprise Value to Revenue 9 To 15