How the EV/Revenue multiple values companies with little profit

Some companies have strong sales but little or no profit yet. Ratios like P/E do not work for them. The EV/Revenue multiple offers another way to compare. This page explains what it is, how to calculate it and when it makes sense.

Quick answer

EV/Revenue is a valuation multiple that divides a company's enterprise value (EV) by its revenue, usually for the last twelve months or a forecast year. It shows how much the market values each rupee of sales. It is useful for companies with low or negative profits, such as young or fast-growing firms, but it ignores profitability, so it must be read alongside margins.

Key takeaways

• EV/Revenue = enterprise value divided by revenue.
• It shows how much the market pays per rupee of sales.
• It works for companies with low or negative profits.
• It ignores margins, so compare similar businesses only.
• It is also called the EV/Sales multiple.

What is the EV/Revenue multiple?

Enterprise value is the total value of a business: market value of equity plus debt, minus cash. Revenue is total sales. Dividing one by the other tells you how many rupees of enterprise value the market assigns to each rupee of revenue.

It is sometimes called EV/Sales. Because it uses enterprise value, it accounts for debt, which makes comparisons between companies with different borrowing levels fairer than a simple price to sales ratio.

How is it calculated?

In this example, the market values the business at three times its annual sales. The figures are only for illustration.

When is the multiple useful?

It is helpful for companies that are not yet profitable, such as early-stage technology or new-age businesses, where P/E cannot be used. Revenue is also less affected by accounting choices than profit, and it is rarely negative.

Analysts also use it in comparable company analysis and in precedent transactions, especially in sectors where companies are still building scale.

What are the limits?

The biggest limit is that it ignores profitability. Two companies with the same revenue and the same multiple can be very different if one earns a 25 percent margin and the other loses money on every sale. A low multiple may simply reflect weak margins.

So the ratio should be compared only among similar businesses with similar margin profiles, and read alongside measures like EV/EBITDA, gross margin and growth. A high multiple often reflects high growth expectations, which may or may not be met.

The key point to remember

EV/Revenue tells you what the market pays for each rupee of a company's sales. It fills a gap when profits are small, but it is never enough on its own to judge whether a business is fairly valued.

Frequently Asked Questions