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ValuationIntermediate

EV/EBITDA and EV/Sales

Enterprise value multiples compare operating value before deciding how to finance it. They are useful, but can ignore investment, taxes and margin quality.

3 min read Practical guide

By the end

You will know when EV/EBITDA or EV/Sales is comparable and when it is misleading.

EV and EBITDA

EV/EBITDA approximates how much operating profit is paid before depreciation. It makes it easier to compare different debt, but EBITDA is not cash: it excludes capex, working capital, interest and taxes.

EV/Sales

It is used when profits are negative or margins are changing. Two companies at 5x sales are not equivalent if one converts 30% in FCF and another loses money. The multiple only makes sense next to the sustainable margin.

Example

A: 4x EV/Sales and 25% target margin implies 16x EV/operating profit. B: 2x and 5% margin implies 40x. The seemingly cheap one can be more expensive.

Necessary settings

Includes debt, cash, leases and minorities consistently. Normalizes EBITDA without deleting recurring costs and checks capitalization of expenses. Use the same period and currency.

Use by scenarios

Project sales and margin, apply an exit multiple, subtract future net debt, and divide by diluted shares. Sensitize the three variables: small variations combined produce very different targets.

Definition of EV.
Normalized EBITDA.
Capex and FCF.
Sustainable margin.
Future debt and dilution.

From data to a decision

Does the multiple capture debt and profitability?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

EV compares operations with different financing structures.

Adverse reading

EBITDA ignores capex and sales ignore margin; the multiple hides cash consumption.

Required confirmation

Link EV/sales to future margin and EV/EBITDA to capex and debt.

Reasoned example

Two firms at 3x sales are not equal if one has a 30% margin and the other loses money.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

  1. 1Rebuild EV from diluted market cap, debt, cash, leases and minorities.
  2. 2Adjust EBITDA without ignoring recurring compensation, maintenance or capitalised expense.
  3. 3Use EV/Sales only alongside a plausible normalised margin.
  4. 4Compare companies with similar accounting, geography and maturity.

Review questions

  • Which liabilities does the shareholder acquire?
  • Does EBITDA approximate cash in this business?
  • Which margin must EV/Sales achieve to be cheap?

Worked case

Cheap sales, insufficient margin

A trades at 2× sales and targets 5% EBIT margin; equals 40× EBIT before adjustments. B is trading at 5× with a 30% margin, equivalent to 16.7×. A seems cheap for sales, but not for profit.

EV/EBITDA also does not discount capex. Compare conversion to FCF and necessary reinvestment.

Decision rule

Always relate the multiple to margin, growth, required capital and balance sheet.

Put it into practice

Convert EV/Sales into an implied multiple on operating profit using three possible spreads.