Measuring the Value of Traditional Org vs. a DAO

• Definition
  • Profitability ratios are financial metrics used by analysts and investors to
    measure and evaluate the ability of a company to generate income (profit)
    relative to revenue, balance sheet assets, operating costs, and shareholders’
    equity during a specific period of time. They show how well a company
    utilizes its assets to produce profit and value to shareholders.

1. Return Ratios
2. Margin Ratios

• Definition
  Return ratios represent the company's ability to generate returns for its
  shareholders. It typically compares a return metric versus certain
  balance sheet items.
  • Return On Equity (ROE)
    • Definition
      • Return on equity is a measure of a company’s annual return (net income) divided by the value of its
        total shareholders’ equity, expressed as a percentage (e.g. 10%). Alternatively, ROE can also be derived by dividing the firm’s dividend growth rate by its earnings retention rate (1-dividend payout ratio)
    • ROE = NetIncome / Shareholder's equity
  • Return on Assets (ROA)
    • Definition
      • Return on assets (ROA) is a type of profitability ratio that measures the profitability of a business in
        relation to its total assets
    • ROA = NetIncome / TotalAssets
  • Return on Capital Employed (ROCE)
    • Definition
      • Return on Capital Employed (ROCE) is a profitability ratio that measures how efficiently a company is using its capital to generate profits. The return on capital employed is considered one of the
        best profitability ratios and is commonly used by investors to determine whether a company is
        suitable to invest in.
    • ROCE = EBIT / (TotalAssets - CurrentLiabilities)

• Margin Ratios
  • Definition
    • Margin ratios represent the company’s ability to convert sales into
      profits at various degrees of measurement. Margin ratios typically look at certain returns compared to the top line (revenue). Typically, it compares income statement items.
  • Gross Margin Ratio (GMR)
    • #Definition
      • The gross margin ratio, also known as the gross profit margin ratio, is a profitability ratio that
        compares the gross margin of a company to its revenue. It shows how much profit a company
        makes after paying off its cost of goods sold (COGS). The ratio indicates the percentage of each
        dollar of revenue that the company retains as gross profit, so naturally a high gross margin ratio is
        desired.
    • GMR = Gross Profit (Total Revenue - COGS) / Total Revenue
  • Operating Profit Margin (OPM)
    • Definition #Definition
      • Operating profit margin is a profitability ratio used to calculate the percentage of profit a company
        produces from its operations, prior to subtracting taxes and interest charges
    • OPM = (TotalRevenue - COGS - OperatingExpenses - Depreciation & Amortization ) / Total Revenue
  • Net Profit Margin(NMR)
    • Definition
      • Net profit margin (also known as “profit margin” or “net profit margin ratio”) is a financial ratio used
        to calculate the percentage of profit a company produces from its total revenue.
    • NMR = Net Income / Total Income

• Debt-to-Equity Ratio
  • Definition
    • The debt-to-equity ratio is a leverage ratio that calculates the proportion of total debt and liabilities
      versus total shareholders’ equity. The ratio compares whether a company’s capital structure utilizes
      more debt or equity financing.
      The ratio looks at total debt which consists of short-term debt, long-term debt, and other fixed
      payment obligations (such as capital leases).
  • Formula
    • DER = (Shortterm Debt + LongtermDebt + OtherFixed Payments) / Sharehodlers' equity
  • Interpretation
    • If the total debt of a business is worth $50 million and the total equity is worth $120 million, as per the above formula, debt-to-equity would be 0.42. In other words, the firm has 42 cents in debt for every dollar of equity.
    • A higher debt-equity ratio indicates a levered firm – a firm that is financed with debt. Leverage has benefits such as tax deductions on interest expenses but also the risks associated with these expenses. Thus, leverage is preferable for companies with stable cash flows, but not for companies in decline. The appropriate debt-to-equity ratio varies by industry

• Equity Ratio

  • Definition

    • The equity ratio is a leverage ratio that calculates the proportion of total shareholders’ equity versus total assets. The ratio determines the residual claim of shareholders on a business. It determines what portion of the business could be claimed by shareholder in a liquidation event

  • Formula

    • EquityRatio = Shareholders' equity (Assets - Liabilities) / Total Assets

  • Interpretation

    • The accounting equation can be rearranged to Equity = Assets – Liabilities. By using this as the numerator of the equity ratio, the ratio can be written as (Assets-Liabilities)/Assets. In other words, it would be the percentage of total assets after all liabilities have been subtracted.

    • For example, if Company XYZ has a total of $15 million in total shareholder’s equity and total assets are equal to $50 million, then the equity ratio of this company would be equal to 0.3. It typically is expressed as a percentage. Therefore, it would be 30% in the above example.

• Debt Ratio
  • Definition
    • The debt ratio, also known as the debt-to-asset ratio, is a leverage ratio that indicates the percentage of assets that are being financed with debt. The higher the ratio, the greater the degree of leverage and financial risk.
      The debt ratio is commonly used by creditors to determine the amount of debt in a company, the ability to repay its debt, and whether additional loans will be extended to the company. On the other hand, investors use the ratio to make sure the company is solvent, have the ability to meet current and future obligations, and can generate a return on their investment.
  • Formula
    • ST + LT Debt / Total Assets
  • Interpretation
    • The debt ratio is commonly used by analysts, investors, and creditors to determine the overall risk of a company. Companies with a higher ratio are more leveraged and hence, riskier to invest in and provide loans to. If the ratio steadily increases, it could indicate a default at some point in the future.
      • A ratio equal to one (=1) means that the company owns the same amount of liabilities as
      its assets. It indicates that the company is highly leveraged.
      • A ratio greater than one (>1) means the company owns more liabilities than it does assets.
      It indicates that the company is extremely leveraged and highly risky to invest in or lend to.

• Definition
  • The accounts receivable turnover ratio, sometimes known as the debtor’s turnover ratio, measures the number of times over a specific period that a company collects its average accounts receivable. The accounts receivable turnover ratio can also be manipulated to obtain the average number of
    days it takes to collect credit sales from customers, known as accounts receivable days.
• Formula
  • Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable
  • Net Credit Sales = Sales on Credit – Sales Returns – Sales Allowances
    Average Accounts Receivable = (Accounts Receivableending + Accounts Receivablebeginning)/2
• Interpretation
  • For example, at the end of a fiscal year, a company has credit sales of $50,000 and returns of $3,200. At December 31st, the company had accounts receivable of $6,000. At January 1st, accounts
    receivable was $3,000. Therefore, its accounts receivable turnover ratio for this fiscal period (365 days) would be = (50,000 – 3,200) / ((6,000 + 3,000) / 2) = 10.4.
  • Analyzing this, the company collects its accounts receivables about 10.4 times a year. This number should be compared to industry averages to see how efficient the company is in collecting payments versus its competitors.

• Definition

  • Accounts receivable days are the number of days on average that it takes a company to collect on credit sales from its customers. This formula is derived by using the previously mentioned accounts receivable turnover ratio.

• Formula

  • Accounts receivable days = Number of Days in Period / Accounts Receivable Turnover Ratio
  • Accounts Receivable Turnover Ratio = Net Credit Sales/Average Accounts Receivable

• Interpretation

  • Using the same example, at the end of a fiscal year, a company has credit sales of $50,000 and returns of $3,200. At December 31st, the company had accounts receivable of $6,000. At January 1st, accounts receivable was $3,000. Therefore, its accounts receivable turnover ratio for this fiscal
    period (365 days) would be = (50,000 – 3,200) / ((6,000 + 3,000) / 2) = 10.4. We can use these numbers to calculate the accounts receivable days, which would be = 365 / 10.4 = 35.1.

  • Analyzing this, it takes the company 35.1 days on average to collect its accounts receivables. As with the accounts receivable turnover ratio, this number should be compared to industry averages to see how efficient the company is in collecting payments versus its competitors.

• Definition

  • The asset turnover ratio, also known as the total asset turnover ratio, measures how efficient a company uses its assets to generate sales. This ratio looks at how many dollars in sales is generated per dollar of total assets that the company owns.

• Formula

  • Asset Turnover Ratio = Net Sales / Average Total Assets

• Interpretation

  • Please note, an analyst can also choose to use period end total assets instead of average total assets.
    In this example, a company has net sales of $100,000 for the year. On December 31st, the company had total assets of $65,000. On January 1st, the company had total assets of $57,000. The company’s
    asset turnover ratio would then be = 100,000 / ((65,000 + 57,000) / 2) = 1.64. This means that for every dollar of total assets, the company generates about $1.64 in net sales. Like many other ratios, a single period’s asset turnover ratio is not very useful on its own. However,
    when compared to the asset turnover ratios of comparable companies in the same industry, it can reveal how well the company is doing relative to competitors. The ideal or average asset turnover ratio depends on the company's industry.

  • A higher ratio is generally favorable as it indicates efficient use of assets. Conversely, a low ratio may imply poor utilization of assets, poor collection methods, or poor inventory management.

• Definition
  • The inventory turnover ratio measures how many times a business sells and replaces its stock of goods in a given period. This ratio looks at the cost of goods sold relative to the average inventory in the period. This ratio indicates how efficient a business is at clearing its inventories
• Formula
  • Inventory Turnover Ratio = Cost of Goods Sold/Average Inventory
  • Average Inventory = (Inventoryending + Inventorybeginning)/2
• Interpretation
  • For example, a company has a cost of goods sold of $3 million for the fiscal year. On December 31st, the company’s inventory was $350,000. On January 1st, inventory was $260,000. Therefore, the company’s inventory turnover ratio would be = 3,000,000 / ((35,000 + 26,000) / 2) = 9.84. This
    number means that the company sold its entire stock of inventory 9.84 times in the fiscal year. Additionally, like the accounts receivable turnover ratio, the inventory turnover ratio can be manipulated to give inventory turnover days – the average number of days it takes to sell an entire
    stock of goods

• Definition
  • Inventory Turnover Days are the number of days on average it takes to sell a stock of inventory. This formula is derived using the previously mentioned inventory turnover ratio. Like the inventory turnover ratio, inventory turnover days are a measure of a business' efficiency.
• Formula
  • Inventory Turnover Days = Number of Days in Period/ Inventory turnOver Ratio
• Interpretation
  • Using the same example, a company has cost of goods sold of $3 million for the fiscal year. On December 31st, the company’s inventory was $350,000. On January 1st, inventory was $260,000. Therefore, the company’s inventory turnover ratio would be = 3,000,000 / ((35,000 + 26,000) / 2) =

9.84. This number means that the company sold its entire stock of inventory 9.84 times in the fiscal year. We can use these numbers to calculate the inventory turnover days, which would be = 365 / 9.84 = 37.1.

- Analyzing this, it takes the company 37.1 days on average to sell an entire inventory stock. As with the inventory turnover ratio, this number should be compared to industry averages to see how efficient the company is in converting inventory into sales versus its competitors.

• Definition

  • Asset ratios look at a company’s balance sheet assets to evaluate
    liquidity. These ratios generally use increasingly stricter variants of
    current assets to determine a company’s level of solvency.

• Current Ratio

  • Definition
    • The current ratio, otherwise known as the working capital ratio, measures the ability of a business to meet its short-term obligations that are due within a year. The ratio compares total current assets to total current liabilities. The current ratio looks at how a company can maximize the liquidity of its current assets to settle its debt obligations
  • Formula
    • Current Ratio = Current Assets / Current Liabilities
  • Interpretation
    • The current ratio is more comprehensive than other liquidity ratios, such as the quick ratio, as it considers all current assets, including cash marketable securities, accounts receivable, and inventory.
    • If a business has current assets of $60 million and current liabilities of $30 million, it has a current ratio of 2. Interpreting this ratio of 2, the business can pay off its current liabilities, such as accounts payable, twice with its current assets.
    • Typically, a current ratio greater than 1 suggests financial well-being for a company. However, too
      high of a current ratio also suggests that the company is leaving too much excess cash unused,
      rather than investing the cash into projects for company growth.

• Quick Ratio

  • Definition

    • The quick ratio, also known as the acid-test ratio, measures the ability of a business to pay its shortterm liabilities by having assets that are readily convertible into cash. These assets are cash, marketable securities, and accounts receivable. These assets are considered “quick” assets because they can be quickly and easily converted into cash.

  • Formula

    • Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities

  • Interpretation

    • Compared to the current ratio, the quick ratio only looks at the most liquid assets. The quick ratio evaluates a company’s ability to pay its short-term liabilities with only assets that can quickly be converted into cash. Therefore, the quick ratio excludes accounts such as inventories and prepaid expenses.

    • If a company has cash of $20 million, marketable securities of $10 million, accounts receivable of $18 million, and current liabilities of $25 million, it has a quick ratio of 1.52. This means that the business can pay off its 1.52 times its current liabilities using its most liquid assets.
      A quick ratio greater than 1 strongly implies financial well-being for the company as it shows that
      the company can repay its short-term debt obligations with only its liquid assets. However, like the
      current ratio, a quick ratio that is too high also suggests that the company is leaving too much
      excess cash instead of investing to generate returns or growth.

• Cash Ratio

  • Definition
    • The cash ratio, sometimes called the cash asset ratio measures a company’s ability to pay off its short-term debt obligations with cash and cash equivalents. Compared to the current ratio and the quick ratio, the cash ratio is a stricter, more conservative measure because only cash and cash equivalents – a company’s most liquid assets – are considered.
      Cash equivalents are assets that can be converted quickly into cash and are subject to minimal levels of risk. Examples of cash equivalents include savings accounts, treasury bills, and money market instruments.
  • Formula
    • Cash Ratio = (Cash and Cash Equivalents) / Current Liabilities
  • Interpretation
    • The cash ratio is much stricter than the current ratio and the quick ratio as it only uses cash and cash equivalents in its calculation. The cash ratio indicates the percentage of a company’s short-term debt obligations that cash and cash equivalents can cover.
    • If a company has cash of $10 million, treasury bills worth $5 million, and current liabilities of $25million, it has a cash ratio of 0.6. This means that the business can pay its current liabilities 0.6
      times, or 60% of its current liabilities using cash and cash equivalents. Creditors prefer a higher crash ratio as it indicates the company can easily pay off its debt. There is no ideal figure but a ratio between 0.5 to 1 is usually preferred. As with the current and quick ratios, too high of a cash ratio indicates that the company is holding onto too much cash instead of utilizing its excess cash to invest in generating returns or growth.

• Defensive Interval Ratio (DIR)

  • Definition
    • The defensive interval ratio (DIR), also known as the basic defense interval ratio (BDIR) or the defensive interval period ratio (DIPR), indicates how many days a company can operate without needing to tap into capital sources aside from its current assets. These other capital sources may include long-term assets such as a company’s property, plant, and equipment which are considerably less liquid and would take more time to liquidate at fair market
      value.
  • Formula
    • Defensive Interval Ratio = Current Assets / Daily Expenditures
  • #Interpretation
    • To calculate this ratio, daily expenditures are calculated as:
      Daily expenditures = (annual operating expenses – non-cash charges)/365
      For example, a company currently has $30,000 in cash, $7,000 in accounts receivable, and $18,000 in marketable securities. It also has $270,000 in annual operating expenses and incurs $23,000 in annual depreciation. The daily expenditures equal to: = (270,000 – 23,000) / 365 = 676.7. The
      company’s DIR would be = (30,000 + 7,000 + 18,000) / 676.7 = 81.28. This means the company can operate for 81 days and remain liquid without tapping into its long-term assets.
      This ratio is best used when comparing it to compare companies within the same industry to gain insight into how the company is doing relative to its competitors. Alternatively, it can be compared with the company’s historical DIR to see how the company’s liquidity has changed

• Definition

  • Earnings ratios use a company’s earnings to evaluate liquidity. These
    ratios may use different variants of earnings (e.g. EBIT, EBITDA)
    depending on the needs of the financial analyst.

• Times Interest Earned Ratio (TIE)

  • Definition
    • The times interest earned (TIE) ratio measures a company’s ability to meet its debt obligations periodically. This ratio calculates the number of times a company could pay its periodic interest expenses if it devoted all its earnings before interest and taxes (EBIT) to debt repayments. This ratio is used to help quantify a company’s probability of default. This in turn helps determine relevant debt parameters such as the appropriate interest rate to be charged or the amount of debt the company can safely take on.
  • Formula
    • TIE Ratio = Earnings Before Interest & Taxes / Interest Expense
  • Interpretation
    • A higher times interest earned ratio suggests that a company will be less likely to default on its loans. This implies that the company is a safer investment opportunity for debt providers. Conversely, a low times interest earned ratio means a company has a higher chance of default.
    • If a company has an EBIT of $7.8 million and an interest expense of $1.2 million, its TIE ratio would be 1.2. If throughout several years, a company’s TIE ratio continually increases, it implies that the company is managing its creditworthiness well and can generate profits without relying on
      additional debt funding. Therefore, it can viably consider financing large projects with debt rather than equity.
      As with all liquidity ratios, having too high of a TIE ratio suggests that the company is not properly utilizing its excess cash towards growth and return-generating projects and is instead leaving it unused.

• Times Interest Earned (Cash - Basis) Ratio (TIE - CB)

  • Definition

    • The Times Interest Earned (Cash Basis) (TIE-CB) ratio is similar to the Times Interest Earned (TIE) ratio. Like the TIE ratio, the TIE-CB ratio measures a company’s ability to make periodic interest payments on its debt obligations. The difference between the two ratios is that the TIE-CB ratio uses adjusted operating cash flow rather than earnings before interest and taxes (EBIT). Thus, the ratio is computed on a “cash-basis”, only considering how much disposable cash a business has on hand.
    • This ratio is used to quantify the probability of a business defaulting on its loans. It is used to help determine debt parameters such as the appropriate interest rate to be charged or the amount of debt the business can safely take on.

  • Formula

    • TIE - CB Ratio = Adjusted Operating CashFlow / Interest Expense
    • Adjusted Operating Cash Flow = Cash Flow from Operations + Taxes + Fixed Charges

  • Interpretation

    • For example, a company has cash flow from operations of $15,000, fixed advertising costs of $2,500, fixed rent costs of $3,000, fixed utilities costs of $500, interest expense of $1,000, and income taxes of $500. Based on this information, the company’s TIE-CB ratio would be = (15,000 +2,500 + 3,000 + 500 + 500) / 1,000 = 21.5

    • Like the TIE ratio, it is important to compare the TIE-CB ratio to a company’s historical TIE-CB ratios to look for trends. An increasing TIE-CB ratio implies financial health. Alternatively, it could be compared to comparable companies to see how the company is performing relative to its competitors. Also like the TIE ratio, having too high of a TIE-CB ratio implies underutilized excess cash

• Definition

  • Cash flow ratios utilize a company’s cash flows to determine liquidity. By
    using cash flows, financial analysts can determine how well a company’s
    day-to-day operations cover debt obligations.

• CAPEX to Operating Cash Ratio

  • Definition

    • The CAPEX to Operating Cash Ratio assess how much of a company’s cash flow from operations is being devoted to capital expenditure. This ratio is used to quantify how much a company focuses on growth. It also shows how much of a company’s CAPEX is conducted using cash and is useful for
      assessing financial risk. Capital expenditures consist of capital-intensive investments such as expanding a production facility or constructing new company buildings.

  • Formula

    • CAPEX to Operating Cash Ratio = Cashflow from Operations / Capital Expenditures

  • Interpretation

    • Typically, smaller companies that are still growing and expanding have higher CAPEX to operating cash ratios. These smaller companies usually need to invest more in research and development (R&D). Lower ratios may indicate that a company has reached maturity and is no longer pursuing
      aggressive growth.

    • While a high CAPEX to operating cash ratio is generally a good sign for a growing company, a ratio that is too high may not be a good sign. If a company is spending all its cash in capital expenditure projects, it may face liquidity issues in the future. Heavy capital expenditures may compromise a
      company’s ability to fulfill its periodic debt payments. Conversely, if the ratio is too low for a smaller company, it may imply that it is not investing enough into R&D or other capital projects, which may compromise a business's growth potential.

• Operating Cash Flow Ratio

  • Definition

    • The operating cash flow ratio measures how well a company can pay off its current liabilities with the cash flow generated from its core business operations. Another way to look at this ratio is that it shows how much a company earns from its operating activities per dollar of current liabilities.
      Since earnings numbers can be manipulated by management, the operating cash flow ratio is used as a more accurate measure of a company’s short-term liquidity.

  • Formula

    • Operating Cash Flow Ratio = CashFlow from operations / Current Liabilities

  • Interpretation

    • A company’s cash flow from operations is one of the most important numbers in a company’s accounts. It reflects the cash that a business generates solely from its core business operations. It is derived from the core offering of the company.

    • If a company has cash flow from operations of $120,000 and current liabilities of $100,000, it has an operating cash flow ratio of 1.2. This means that the company earns $1.25 from operating activities for every dollar of current liabilities. Alternatively, it also means that the company can cover 1.2 times its current liabilities with its operating cash flows.

    • The operating cash flow ratio is different from other liquidity ratios such as the current ratio. Unlike other liquidity ratios that use the assets that are currently held by the company in their calculations, the operating cash flow ratio looks at a company’s cash flow. For example, having too high of a
      current ratio implies that the company is inefficient in using its excess cash which may caution analysts. Conversely, having a high operating cash flow ratio does not imply poor performance as it shows that a company is efficient in generating cash flows per dollar of current liabilities.

• Definition

  • Price ratios use the most recent company share price to drive insights
    about company value for financial analysts. These ratios are quick to
    calculate but can be affected by different accounting policies and
    treatment.

• Price to Earnings Ratio

  • Definition

    • The price-to-earnings (P/E) ratio compares a company’s stock price with its earnings per share (EPS). This ratio is commonly used as a valuation metric to compare the relative value of different companies. The P/E ratio shows the expectations of the market and is the price paid per unit of current earnings.

  • Formula

    • Price to Earnings Ratio = Share Price / Earnings Per Share
    • Earnings per Share = (Net Income – Preferred Dividends)/Weighted Avg. Shares Outstanding

  • Interpretation

    • Companies with a high P/E ratio are often considered growth stocks. This indicates positive future performance and earnings growth as investors are willing to pay more per dollar of current earnings. However, growth stocks are usually more volatile and have more investor pressure to perform well. Stocks with high P/E ratios may also be considered overvalued. Conversely, companies with a low P/E ratio are often considered value stocks. They are undervalued relative to their competitors and the company's intrinsic value. These stocks are a bargain that investors aim for before the markets correct their valuations on them.

    • The P/E ratio can also be used to compare stocks at different prices.
      For example, if Stock A is trading at $30 and Stock B at $20, Stock A appears to be more expensive. However, if Stock A had a lower P/E ratio than Stock B, its price per unit of earnings would be lower than Stock B, thus making Stock A cheaper from an earnings perspective.

Enterprise value ratios are calculated using a company’s enterprise
value to drive the valuation process. These ratios measure the return on
a company’s capital investments. Many enterprise value ratios also
isolate earnings from accounting-affected items such as interest and
depreciation.

• Definition
  • The EV/EBIT ratio compares a company’s enterprise value (EV) to its earnings before interest and taxes (EBIT). EV/EBIT is commonly used as a valuation metric to compare the relative value of different businesses. While similar to the EV/EBITDA ratio, EV/EBIT incorporates depreciation and amortization.
• Formula
  • EV/ EBITDA = Enterprise Value (Market Cap + Net Debt) / Earnings before Interest, Tax, Depreciation and Amortization
  • Market Capitalization = Share Price x Number of Shares
  • Net Debt = Market Value of Debt – Cash and Cash Equivalents
• Interpretation
  • Like the price-to-earnings ratio, EV/EBITDA is an important ratio when it comes to valuation. It can be used to determine a target price in an equity research report or value a company compared to its peers.
  • For example, Company A is going public and analysts need to determine its share price. Company A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/EBITDA ratios for these companies respectively are 12.1x, 11.3x, 10.8x, 9.2x, and 13.4x. The average of EV/EBITDA would be 11.4x. A financial analyst would apply this 11.4x multiple to Company A’s EBITDA to find its EV and its equity value and share price.

• Definition

  • The EV/EBITDA ratio compares a company’s enterprise value (EV) to its earnings before interest, taxes, depreciation, and amortization (EBITDA). EV/EBITDA is commonly used as a valuation metric to compare the relative value of different businesses.

• Formula

  • EV/ EBIT = Enterprise Value (Market Cap + Net Debt) / Earnings before Interest and Tax

  • Market Capitalization = Share Price x Number of Shares

  • Net Debt = Market Value of Debt – Cash and Cash Equivalents

• Interpretation

  • Though less commonly used than EV/EBITDA, EV/EBIT is an important ratio when it comes to valuation. It can be used to determine a target price in an equity research report or value a company compared to its peers. The major difference between the two ratios is EV/EBIT’s inclusion of depreciation and amortization. This is useful for capital-intensive businesses where depreciation is a true economic cost.

  • In this example, Company A is going public, and analysts need to determine its share price. Company A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/EBIT ratios for these companies respectively are 11.3x, 8.3x, 7.1x, 6.8x, and 10.2x. The average EV/EBIT would be 8.7x. A financial analyst would apply this 8.7x multiple to Company A’s EBIT to find its EV and its, equity value and share price.

• Definition

  • The EV/Revenue ratio compares a company’s enterprise value (EV) to its revenue. The EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different businesses. EV/Revenue is one of the only performance-related multiples valuation ratios available for companies with negative EBITDA.

• Formula

  • EV / Revenue = Enterprise Value (Market Cap + Net Debt) / Revenue
  • Market Capitalization = Share Price x Number of Shares
  • Net Debt = Market Value of Debt – Cash and Cash Equivalents

• Interpretation

  • Compared to other ratios, EV/Revenue is most often used when a company does not have a positive EBITDA or net income. It can be used to determine a target price in an equity research report or value a company compared to its peers.

  • For example, Company A is going public and analysts need to determine its share price. Company A has five similar companies that operate in its industry, Companies B, C, D, E, and F. The EV/Revenue ratios for these companies respectively are 12.1x, 11.3x, 10.8x, 9.2x, and 13.4x. The average of EV/Revenue would be 11.4x. A financial analyst would apply this 11.4x multiple to Company A’s Revenue to find its EV and its equity value and share price.