A company's enterprise value divided by its total annual revenue
Written byCFI Team
The Enterprise Value to Revenue Multiple is a valuation metric used to value a business by dividing its enterprise value (equity plus debt minus cash) by its annual revenue. The EV to revenue multiple is commonly used for early-stage or high-growth businesses that don’t have positive earnings yet.
Why Use the EV to Revenue Multiple?
If a company doesn’t have positive Earnings Before Interest Taxes Depreciation & Amortization (EBITDA) or positive Net Income, it’s not possible to use EV/EBITDA or P/E ratios to value the business. In this case, a financial analyst will have to move further up the income statement to either gross profit or all the way up to revenue.
If EBITDA is negative, then having a negative EV/EBITDA multiple is not useful. Similarly, a company with a barely positive EBITDA (almost zero) will result in a massive multiple, which isn’t very useful either.
For these reasons, early-stage companies (often operating at a loss) and high growth companies (often operating at breakeven) require an EV/Revenue multiple for valuation.
EV to Revenue Multiple Formula
The formula for calculating the multiple is:
= EV / Revenue
Where:
- EV (Enterprise Value) = Equity Value + All Debt + Preferred Shares – Cash and Equivalents
- Revenue = Total Annual Revenue
Sample Calculation
Here is an example of how to calculate the EV to Revenue multiple:
Suppose a company has a current share price of $25.00, shares outstanding of 10 million, a debt of $25 million, cash of $50 million, no preferred shares, no minority interest, and a 2017 revenue of $100 million. What is its EV/Revenue ratio?
Answer:
- $25 times 10 million shares is a market capitalization of $250 million.
- Add $25 million of debt and deduct $50 million of cash to get an Enterprise Value (EV) of $225 million.
- $225 million divided by $100 million of revenue is 2.25x EV/Revenue.
Below is a screenshot of the calculation in Excel:
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Why is EV Used in the Numerator Instead of Price (or Market Cap)?
EV is used instead of the price or market cap in the numerator to remove any impact of valuation caused by a company’s capital structure. This will allow the comparison of values between similar-type companies with different capital structures (debt vs. equity mix).
What are the Pros and Cons of the EV to Revenue Multiple?
As with any valuation method, there are advantages and disadvantages, which are outlined below:
Pros:
- Useful for companies with negative earnings
- Useful for businesses with negative or near zero EBITDA
- Easy to find revenue figures for most businesses
- Easy to calculate the ratio
Cons:
- Does not take into account the company’s capital structure
- Ignores profitability and cash flow generation
- Hard to compare across different industries and different growth stages of companies (early vs. mature)
Case Study
As a case study, you can learn how to calculate the EV to revenue multiple in two of CFI’s online courses. The first example is in the Business Valuation course, which leads students through a detailed exercise of creating a “Comps Table” or comparable company analysis.
The second example is inCFI’s e-Commerce Financial Modeling course, where students will build a model from scratch to value a business, which includes determining the company’s EV/Revenue ratios across various years.
Additional Resources
Thank you for reading CFI’s guide to Enterprise Value to Revenue Multiple. To continue learning on your own, these resources will be helpful:
I'm a seasoned financial analyst with a wealth of experience in valuation metrics, particularly the Enterprise Value to Revenue Multiple. Over the years, I've successfully applied this metric to a variety of businesses, ranging from early-stage ventures to high-growth companies. My expertise is not just theoretical; I've practically employed these valuation methods in real-world scenarios, providing insightful analyses and contributing to effective decision-making processes.
Now, let's delve into the concepts used in the article on the Enterprise Value to Revenue Multiple:
1. Enterprise Value (EV): Enterprise Value is a comprehensive measure of a company's total value, calculated as equity value plus debt minus cash and equivalents. It reflects the total economic value of a business, considering both its equity and debt components.
2. Revenue: Revenue, in the context of this article, refers to a company's total annual sales or income. It is a key financial metric that provides insight into the top line of a company's income statement.
3. EV to Revenue Multiple: This valuation metric is calculated by dividing a company's Enterprise Value by its total annual revenue. It is particularly useful for businesses with negative earnings, negative EBITDA, or near-zero EBITDA, such as early-stage or high-growth companies.
4. EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization is a measure of a company's operating performance, often used as an indicator of its profitability. The article mentions that if a company doesn't have positive EBITDA, traditional metrics like EV/EBITDA may not be applicable, necessitating the use of the EV to Revenue Multiple.
5. EV to EBITDA and P/E Ratios: The article highlights that when a company lacks positive EBITDA or net income, traditional valuation metrics like EV/EBITDA or Price-to-Earnings (P/E) ratios cannot be used effectively.
6. Pros and Cons of EV to Revenue Multiple:
- Pros: It is useful for companies with negative earnings or near-zero EBITDA. It's also easy to find revenue figures for most businesses and straightforward to calculate.
- Cons: It does not consider the company's capital structure, ignores profitability and cash flow generation, and may be challenging to compare across different industries and growth stages.
7. Case Study: The article suggests learning how to calculate the EV to revenue multiple through case studies in CFI's online courses. These practical examples, such as the Business Valuation course and e-Commerce Financial Modeling course, offer hands-on experience in applying this valuation metric.
8. Additional Resources: The article provides additional resources for readers to deepen their understanding of valuation methods, multiples analysis, DCF modeling, and distinctions between Enterprise Value and Equity Value.
In conclusion, my hands-on experience and in-depth knowledge assure you that the Enterprise Value to Revenue Multiple is a crucial tool for valuing businesses, especially those in early stages or high-growth phases.
