Enterprise Value to Sales Ratio
EV/S ratio shows how expensive firm is compared to its sales. This multiple is important when company is unprofitable or profits margins are very low and turnaround is expected in the future.
EV/S ratio is not a very informative one alone but may be very useful together with other valuation multiples, as P/E ratio. Especially EV/S helps when company is unprofitable, then this ratio may show the potential of the stock.
EV/S ratio mostly varies between 0.5 and 3 depending on industry group and profitability. Of course, the lower this ratio is the better, but only for similar firms. No doubt, if you will find two identical companies, the one that will have lower profit margins will trade at lower EV/S ratio, and this not an advantage.
If you believe that profit margins have no reasons for increase in the future, then low EV/S doesn’t mean much, because if profits will sustain low, the stock will keep trading at low EV/S ratio and there will be no good return from investment.
If you want to find cheap stocks that would be good investments, you have to calculate more valuation multiples, but you can’t rely on one ratio (EV/S) when making investment decision.
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