I used to publish a Tornado Report (see list below) once a month. It is centered around the Enterprise Value/Sales Ratio (EV/S). Note: I used to refer to this ratio as the Tornado Ratio because (back in the day) nobody had really coined the term "EV/S" yet. The name (Tornado Ratio / Tornado Report) was coined in honour of Geoffrey Moore's book Inside the Tornado.
Update: The reports below are old. Perhaps you'd like to see a more recent (and simplified) report?
EV/S gives us the quickest possible indication of the perceived value of a high tech company versus its sales. No other ratio does this. It works so well because it accounts for market capitalization, cash on hand, debt, and trailing 12 month sales, in a single figure. One look at the number and you have a pulse on a company's perceived health.
EV/S formula is:
EV/S = (Market Capitalization - Cash + Debt) / Sales
The Tornado Report(s) Here are the Tornado Reports!
Background to the "Tornado Report"
Joe Alsop was the primary reason this report was developed. Joe wanted a quick way to look at publicly traded high tech companies and quickly get a sense as to how their valuation was perceived.
Ways to Use the Tornado Report
The Tornado Report was used in a number of ways, including:
Peer Performance Comparison A quick way to evaluate how investors feel about a peer company's value compared to other companies in the same peer group or market segment.
Discover an Undervalued Company. A quick way to highlight a company that you believe is worth more than the current perceived value (perhaps there is a strategic or investment opportunity for you or your company).
Discover an Overvalued Company. A quick way to highlight a company that you believe is worthless than the current perceived value (you could decide to avoid investment, short the stock, avoid a corporate relationship, etc.).
Needless to say, I never recommended that anyone make an investment or strategic decision based on the Tornado Report by itself. I always recommended that someone "do their homework" and "work with professionals".
The EV/S (or Tornado Ratio)óGenerally Speaking
Generally, the higher the EV/S the greater investors' expectations are for the company's future success (which, of course, may not be founded on reality). Nevertheless, it is the "perceived value" that the EV/S reflects. You must watch, of course, for thinly traded stocks or stocks with very thin floats.
EV/S Range Generalizations
The EV/S is just a quick way to understand how investors feel about a company. If the EV/S goes up by a 10th or down by a 10th of a point, there is no definitive point that suddenly turns a healthy company into a sick company or vice versa. Generally, however, the following "ranges" can be used as guides.
Warning: Broad Sweeping Generalizations Ahead:
(These ranges also differ depending on whether a particular high tech company is more service or product oriented. As an example, a EV/S for a rapidly growing and profitable consulting firm will usually never be as high as the EV/S for a rapidly growing and profitable software product company.)
EV/S between 0.8 to 1.1
Generally a EV/S between 0.8 and 1.1 means that the investors' expectations are not great for growth, but they haven't written the company off yet.
EV/S below 0.8
As the EV/S falls below 0.8 and moves lower, this generally indicates that investor sentiment towards the company also moves lower in proportion to the EV/S value until, finally, in the case of a EV/S of zero, the outlook for a company is perceived to be so bad that it is only valued for the company's cash. In some cases, (a negative EV/S), a company is actually valued at less than their "cash on hand." There is another phrase you could use is "a very sick company."
EV/S above 1.2
As the EV/S rises, it can be said that investors' hopes for the company also rise in proportion. Of course, these hopes can be dashed, as was the case in the dot.com era.
Thanks to Joe Alsop and Geoffrey Moore
Joe Alsop and Geoffrey Moore were the reasons this report was developed in the first place. Joe Alsop
Geoffrey Moore gave his blessing for me to call this report the "Tornado Report". This kind of name makes it easy to remember and gets to the point of why I'm in this business (seeking the next "tornado" and building long term shareholder value). Geoffrey Moore, of course, gave high technology a new lingua franca with his books: Crossing the Chasm, Inside the Tornado, The Gorilla Game, and Living on the Fault Line. To an outsider it must seem very strange to hear the words "tornado" or "bowling pin" or" chasm" when referring to a high tech market. Thanks Geoff.
Email Patrick Lannigan at lannigan at gmail dot com for more information
This page was created and/or refreshed on March 09, 2016 @ 11:47:56