Market cap divided by revenue; an equity-level revenue multiple that ignores the debt sitting between the shareholder and the sales.
P/S is popular because revenue is always positive and rarely restated. It is also the least informative multiple in common use, since it says nothing about margin, capital intensity or leverage.
When a company carries meaningful debt, ev-sales is strictly better, because the shareholder does not own the revenue until lenders are paid. Use P/S for quick screening of debt-free companies and little else.
Example: Northwind Tools has a $2.5B market cap on $840M of revenue, 3.0 times sales, against 3.4 times on an enterprise basis. The 0.4 turn difference is the $335M of net debt.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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