13-01-2021 09:48 PM
What is Enterprise-value-to-revenue Multiple?
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 ratio of a company's revenue to the company's total value is actually.
Enterprise Value to Revenue Multiple =EV (enterprise Value) / Revenue
Now, to get the value of Enterprise Value, it is necessary to calculate the total asset value, total debt, number of special shares and the amount of cash or equivalent. The simple concept is that the value of Enterprise Value should be much greater than the value of Revenue. So that the normal value of the Enterprise Value to Revenue Multiple is quite large, for example above 5.
Investors and large companies will try to calculate the value of the Enterprise Value to Revenue Multiple from each company. When you find a company with a large enough Enterprise Value to Revenue value, for example above 5, it means that the company has adjusted the value of Enterprise Value to Revenue. So that 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 Value, for example below 5, it means that the company has not adjusted the value of Enterprise Value to 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 engaged in the same sector will be interested in mergers or acquisitions.
Dynamics of Enterprise Value to Multiple Revenue
When talking about the world of trading and investing, especially stocks, the ratio or comparison that is commonly used is the Price to Earnings Ratio and several other ratios. Meanwhile, the ratio of Enterprise Value to Revenue Multiple is relatively rarely used to assess the fundamentals of a stock. The calculation of Enterprise Value to Revenue Multiple is usually done to assess the fundamentals of a company that has not been registered as a public company.
Hence, the calculation of Enterprise Value to Revenue Multiple will be used far more frequently by large companies that are exploring mergers and acquisitions with other companies that are not yet public companies. By calculating the value of the Enterprise Value to Revenue Multiple, companies that intend to carry out a merger or acquisition can find out what price is appropriate to offer 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 on the secondary market through the stock exchange mechanism, it will be impossible to carry out a fundamental assessment such as calculating the P / E ratio. So that another calculation method is needed to enable investors to buy a portion of their share ownership at an appropriate price. Then just wait patiently so that when one day do an IPO, you can get huge profits many times over.
The benefits and functions of using the Enterprise Value to revenue ratio calculation method are Multiple
The method of calculating the enterprise value to revenue multiple ratio is very useful for internal company parties, market analysts, investors and other interested parties in obtaining an overview of, prospects and opportunities as well as an overview of company performance including to assess the fundamentals of its share price and market capitalization value. Where the smaller the enterprise value revenue multiple, the better the company's performance because it takes a shorter time to break even, and has an impact on the price performance of traded shares.The results of the calculation of the enterprise value to revenue multiple ratio must also be compared with other companies in the same industrial sector so that investors can decide that the share price is undervalued or overvalued and to assess whether the company's financial condition is in positive growth or vice versa.
Then why do you have to use Multiple Enterprise-value-to-revenue?
Sometimes the company does not have income before interest, depreciation and amortization of taxes (EBITDA) or positive net income. So that the EV / EBITDA or P / E formula cannot be used to assess the price of the company. So that a financial analyst must find other ways to determine this assessment. One of them is by looking at the income statement to the company's income.
In addition, sometimes there are companies that have negative tax amortization which makes the negative EV / EBITDA calculation useless. For this reason, companies that are still starting out in the early stages are often in a loss state, which means that the calculation of the value of a company would be better to use the EV / Income multiple ratio for valuation.
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