How to Use EV/Sales in a Simple Valuation Checklist

This is the one-page EV/Sales checklist. It assumes you can calculate EV/Sales in CAD, know when EV/Sales misleads and have a peer comparison. The structure mirrors how to use P/S in a simple valuation checklist, where fair P/S = target P/E × mature net margin. The EV/Sales version differs in two ways: the fair multiple comes from a target EV/EBITDA × mature EBITDA margin, and the walk back to a share price has to deal with cash that will be burned before the company gets there. It is educational; figures are hypothetical.

Direct answer

Use EV/Sales when a company has little or no profit yet, or is at a profit trough, and its balance sheet differs from its peers’. Set bear, base and bull mature EBITDA margins, multiply each by a target EV/EBITDA from mature peers to get a fair EV/Sales, apply it to forward revenue, then add net cash after expected burn (or subtract net debt and other claims) and divide by diluted shares. If the base case only works with today’s full cash balance, the margin of safety is thinner than it looks.

The EV/Sales checklist

#	Step	Question	Pass if
1	Eligibility	Losses or depressed margins, and a balance sheet unlike peers’?	Yes; otherwise use EV/EBITDA or P/FCF
2	EV basis	Full claim list, convertibles treated once?	Built per the calculation post
3	Cash runway	Cash covers the burn to breakeven?	Yes, without a new raise in the base case
4	Revenue quality	Mostly recurring, organic, gross-basis consistent?	Yes, or multiple cut
5	Gross margin	High enough to support the mature EBITDA margin?	Mature EBITDA margin well below gross margin
6	Mature margin	Bear, base, bull written down with reasons	Based on mature peers, not management’s slide
7	Fair multiple	Target EV/EBITDA × mature margin	Target from mature peers, not growth peers
8	Per share	Fair EV + net cash after burn ÷ diluted shares	Calculated
9	Cross-check	Implied years to reach the mature margin	Plausible against history

Worked example (hypothetical)

Forward revenue is C$500M. Net cash today is C$200M, and the company expects to burn about C$120M before reaching breakeven, so net cash after burn is C$80M. There are 100M diluted shares. Mature peers trade around a 12x EV/EBITDA.

Scenario	Mature EBITDA margin	Fair EV/Sales (12x × margin)	Fair EV	+ Net cash after burn	Equity value	Per share
Bear	10%	1.20x	C$600M	C$80M	C$680M	$6.80
Base	18%	2.16x	C$1,080M	C$80M	C$1,160M	$11.60
Bull	25%	3.00x	C$1,500M	C$80M	C$1,580M	$15.80

Using today’s C$200M of net cash instead would add $1.20 to every scenario. That is the trap from the “misleads” post, turned into a number.

Choosing the inputs

Input	How to set it
Mature EBITDA margin	Median of established peers in the same business model; bear below, bull near the best
Target EV/EBITDA	Mature peers’ median, on the same lease basis; see EV/EBITDA vs peers
Forward revenue	Company guidance only if its track record is good; otherwise trailing growth faded
Expected burn	Recent quarterly operating cash outflow plus capex, times quarters to breakeven
Diluted shares	Include options, warrants and in-the-money convertibles

Red flags that override the checklist

Red flag	Why it overrides
Cash runway shorter than the burn to breakeven	A raise is likely; model the dilution first; see spotting dilution risk
Gross margin falling while revenue grows	The mature margin assumption is getting harder
Revenue growth mostly from acquisitions	Organic growth decides the multiple; see organic vs acquisition growth
Going-concern language in the audit report	EV/Sales is the wrong tool for now

Go deeper

Once the company turns profitable, retire EV/Sales and move to how to use EV/EBITDA in a simple valuation checklist. To pressure-test the bear case, see how to stress-test a stock thesis against a recession scenario.

Related reading

• What EV/Sales means for Canadian DIY investors
• How to read unit economics when a company discloses them
• How to evaluate customer retention clues in subscription businesses
• Triangulating multiples, DCF and peer checks

Sources

• IFRS 15 Revenue from Contracts with Customers.
• IAS 1 Presentation of Financial Statements (going concern and liquidity disclosure).
• IAS 33 Earnings per Share (diluted shares).
• NI 52-112 Non-GAAP and Other Financial Measures Disclosure (EBITDA).

Media credits

• Hero: “120316-F-LR266-986 C-130J Hercules Cockpit Ramstein Air Base 2012.jpg” by Staff Sgt. Chris Willis, U.S. Air Force, public domain, via Wikimedia Commons. Cropped and resized to 1280x720. Real photograph of pilots in a C-130J cockpit, not AI-generated.

By Andrew · stocksummarizer.com