Definition

Enterprise Value to Revenue (EV/Revenue) is a financial metric used to assess the value of a company relative to its revenue. It provides an indication of how much investors are willing to pay for each dollar of revenue generated by the company.

Formula

EV/Revenue = Enterprise Value / Revenue

How to use the valuation method

The EV/Revenue ratio is used by investors and analysts to compare the valuation of companies within the same industry. A lower EV/Revenue ratio may indicate that a company is undervalued relative to its peers, while a higher ratio may suggest overvaluation. It is particularly useful for evaluating companies that are not yet profitable or have inconsistent earnings.

Which industries it work best in

The EV/Revenue ratio works best in industries where companies have high revenue growth but may not yet be profitable, such as technology and biotechnology sectors. It is also useful in industries with significant capital expenditures or where earnings are volatile.

Which industries it does not apply to and why

The EV/Revenue ratio is less applicable to industries where revenue does not directly correlate with profitability, such as financial services and utilities. In these industries, other metrics like Price to Earnings (P/E) or Price to Book (P/B) ratios may provide more meaningful insights.

Summary

The Enterprise Value to Revenue ratio is a useful tool for evaluating the relative valuation of companies, especially in high-growth industries. It allows investors to assess how much they are paying for each dollar of revenue, providing insights into potential undervaluation or overvaluation. However, it is less effective in industries where revenue is not a strong indicator of profitability.