The Enterprise Value / Revenue ratio ("EV/Rev") is an indicator similar to the Price / Sales ratio but with a difference that can make it superior. While both indicators have sales in the denominator, Enterprise Value / Revenue substitutes price with an alternative known as enterprise value.
Enterprise Value = Market Cap - Cash & Equivalents + Debt + Minority Interest + Preferred Shares
Enterprise Value is often simplified to Market Cap - Cash & Equivalents + Debt
Enterprise value can be thought of as the true price of a business since buying a business includes receiving its cash and taking on its debt. Using enterprise value instead of market cap in a valuation metric has the effect of penalizing debt and rewarding cash.
However, problems arise when we look at stocks with the lowest EV/Rev.
The companies with the lowest positive ratios are those that have almost as much cash as market cap plus debt. When a company has more cash than market cap plus debt, the ratio becomes negative and can no longer be compared to other companies. That's even though it may be a better value than a company with a low EV/Rev.
On the other hand, this is not a problem with large cap stocks. Stocks with negative enterprise values are mostly micro-cap stocks with troubled operating history.
In short, Enterprise Value / Revenue has an advantage over the similar Price / Sales ratio but also has a problem when applied to micro-cap stocks. Although it should not be the only indicator used to determine which stocks to invest in, it can be a powerful tool when combined with other indicators.
A few more thoughts:
Free cash flow, or operating cash flow could be used instead of revenue, as could book value or earnings.
Enterprise Value / Revenue compared to projected growth could be used similarly to the PEG ratio.
Enterprise Value / Revenue data is available on Yahoo Finance.
The median Enterprise Value / Revenue ratio is near 1.5.
S&P 1500 Stocks with the Lowest Enterprise Value to Revenue Ratio
|Company||Ticker||Enterprise Value / Revenue|
|WellCare Health Plans Inc.||WCG||0.02|
|Health Net Inc.||HNT||0.07|
|Ingram Micro Inc.||IM||0.07|
|Tech Data Corp.||TECD||0.07|
|Molina Healthcare Inc.||MOH||0.07|
|World Fuel Services Corp.||[INT||0.09|
|Cardinal Health Inc.||CAH||0.12|
|Office Depot Inc.||ODP||0.13|
|Kelly Services Inc.||KELYA||0.13|
|Eastman Kodak Co.||EK||0.14|
|The Great Atlantic & Pacific Tea Company Inc.||GAP||0.14|
|Nash Finch Co.||NAFC||0.14|
|Novatel Wireless Inc.||NVTL||0.14|
|Stewart Information Services Corp.||STC||0.14|
Disclosure: Disclosure: None