EV to sales ratio Definition

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Apr 132013
 

Enterprise value is the sum of a firm’s market capitalisation and its net debt (short- and long-term debt minus cash). It measures the value of a firm as represented by the contribution made by external banks and shareholders.

By comparing it to the sales figure (usually for the most recent 12-month period) you get a valuation ratio. So if a firm’s market capitalisation is £100m and its net debt is £150m, EV is £250m. If the sales figure is £25m, the EV/sales ratio is expressed as ten. The higher the multiple, the more highly rated the company.

There are some problems, however. For starters, the sales figure gives no indication of profitability or cash flow. So some analysts prefer to look at EV/Ebitda (earnings before interest, tax, depreciation and amortisation), or EV/cash flow instead.

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EV/Ebit ratio Definition

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Apr 052013
 

Enterprise value to earnings before interest and tax (EV/Ebit) is a way of deciding whether a share is cheap (a low number) or expensive relative to, say, its peers or the wider market. It is similar to the commonly quoted price/earnings ratio (p/e), but modified to address some of that ratio’s weaknesses. For example, rather than using just the firm’s share price – which ignores debt – it uses enterprise value. That’s the combined value of debt (less cash balances) and equity funds in the business. This EV is then compared to earnings before, rather than after, tax and interest – two costs that are not directly related to the operating profitability of a firm. That’s fine, but like all ratios, it is of limited use in isolation.

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Earnings per share Definition

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Feb 252013
 

Earnings per share is seen as one of the best means of determining a share’s true price, as it shows how much of a firm’s profits (after tax) each shareholder owns. It is calculated by dividing a company’s net earnings by the number of shares issued, and is most often used as a means of comparing one company with another, assuming that they are in the same industry. So if a company had net earnings of £1,000 with 200 shares issued, it would have an EPS of 5. By looking at the EPS over several years you can look for a growth pattern and compare it with the market and industry.

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