Enterprise Value to Revenue Multiple is a calculation that compares the value of Enterprise value to Revenue. The concept of calculating Enterprise Value to Revenue Multiple is actually a way to find out how much the actual ratio between a company’s revenue and the company’s total value is.
Formula:
Enterprise Value to Revenue Multiple = Enterprise Value / Revenue
Well, to get the value of Enterprise Value, it is necessary to do a calculation by calculating the total value of assets, total debt, number of special shares and the amount of cash or the equivalent. The simple concept is that the Enterprise Value should be much greater than the Revenue value. So the value of Enterprise Value to Revenue Multiple is normally quite large, for example above 5.
Investors and large companies will try to calculate the Enterprise Value to Revenue Multiple of each company. When you find a company with a large enough Enterprise Value to Revenue Multiple value, for example above 5, it means that the company has experienced an adjustment between the Enterprise Value and Revenue value. So the shares are not worth buying because the value is in accordance with the latest conditions.
However, when investors and large companies find a company with a relatively small Enterprise Value to Revenue Multiple value, for example below 5, it means that the company has not experienced an adjustment between the value of Enterprise Value and Revenue. Then there are two things that might happen, for this investor to be an opportunity to buy shares in the company. Meanwhile, large companies operating in the same sector will be interested in conducting mergers or acquisitions.
Dynamics of Enterprise Value to Revenue Multiple
When talking about trading and investing, especially stocks, the ratios or comparisons that are commonly used are the Price to Earnings Ratio and several other ratios. While the ratio of Enterprise Value to Revenue Multiple is relatively rarely used to assess the fundamentals of a stock. Enterprise Value to Revenue Multiple calculations are usually carried out to assess the fundamentals of companies that have not been registered as public companies.
That’s why the calculation of Enterprise Value to Revenue Multiple will be much more often used by large companies that are exploring mergers and acquisitions with other companies that are not yet public companies. By calculating the value of Enterprise Value to Revenue Multiple, companies that intend to conduct a merger or acquisition can find out what the appropriate price is to be offered in the context of a merger or acquisition.
The calculation of Enterprise Value to Revenue Multiple is also used by investors who focus on buying private companies, small companies with big prospects. Since there are no shares outstanding in the secondary market through the stock exchange mechanism, fundamental assessments such as calculating the P/E ratio will be impossible. Therefore, another calculation method is needed to enable investors to buy a portion of their share ownership at the appropriate price. Then, you just have to wait patiently so that when you do an IPO one day you can get super large profits that will multiply.
one more about the types of calculations related to finance in the micro sphere and related to a financial condition of a company. Maybe we have heard of financial ratios from existing companies, as well as the term enterprise value to revenue multiple, this is one of them. OK, enterprise value to revenue multiple is a comparison of the value of the company’s total assets or enterprise value with total revenue or revenue. Enterprise value here is an asset value of the company as a whole starting from physical or non-physical assets and contains debt or liabilities both long-term and short-term liabilities.
From the above understanding, we can describe the formula for enterprise value to revenue multiple where the formula is as follows:
EV to revenue Multiple = enterprise value / revenue
Where enterprise value = Market Capitalization + Debt – Cash assets
For example, let me give an example of the calculation of the enterprise value to revenue multiple. There is a company that has a market capitalization of 100 billion with a debt of 25 billion and a cash company of 10 billion. The company’s revenue is 35 billion per year. Then the calculation is
EV or enterprise Value = 100 billion + 25 billion – 10 billion = 115 billion
Then EV to revenue multiple = 115 / 35 = 3.29
It can be seen that the value relationship of the enterprise value to revenue multiple is that the smaller the value, the better the overall value of the company and vice versa. We can see that the smaller the enterprise value to revenue multiple, then we know that the revenue or annual income is getting bigger and the bigger the company’s revenue, the better the company’s performance.
One of the functions of this calculation is the need for the acquisition process because this calculation includes the total debt values in the enterprise value calculation. By assessing this calculation, investors or acquiring parties know the value of debt, income, and total assets owned by the company. This calculation should also be used to compare companies in one industrial sector because this value is very sensitive or significant when compared with calculations with companies from other sectors.
Enterprise-value-to-revenue Multiple Is one of the financial ratios that is used as a parameter and benchmark to calculate economic value, market value, stock fundamental value and business value and financial performance of a company that is rarely used but its role and function is very important. to get a comprehensive picture of the existence and viability of the company compared to using mandatory calculation methods such as price to earnings ratio (PER) and price to book value (PBV) which only focuses on the calculation of comparing stock prices with net earnings per share.
Benefits and functions of using the Enterprise Value to revenue Multiple . ratio calculation method
The enterprise value to revenue multiple ratio calculation method is very useful for internal company parties, market analysts, investors and other interested parties in getting an overview of the prospects and opportunities as well as an overview of the company’s performance as well as to assess the fundamentals of its share price and market capitalization value. where the smaller the number of enterprise value revenue multiple means the company’s performance is getting better because it takes a shorter time to reach its break-even point, and has an impact on the performance of traded stock prices. The results of the calculation of the enterprise value to revenue multiple value ratio must also be compared with other companies in the same industrial sector so that investors can decide whether the stock price is undervalued or overvalued and to assess whether the company’s financial condition is in positive growth or vice versa.
