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.
Enterprise Value to Revenue is a component of our stock ratings, which combine multiple indicators into a single market beating system.
S&P 1500 Stocks with the Lowest Enterprise Value to Revenue Ratio
| Company | Ticker | Enterprise Value / Revenue |
| WellCare Health Plans Inc. | WCG | 0.02 |
| Humana Inc. | HUM | 0.04 |
| 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 |
| ResMed Inc. | RMD | 0.1 |
| StarTek Inc. | SRT | 0.11 |
| AmerisourceBergen Corporation | ABC | 0.12 |
| 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 |
| SYNNEX Corp. | SNX | 0.14 |
Disclosure: None
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