EV/Revenue Multiple (2024)

FAQs

What is a good EV to revenue multiple? ›

What is a good Enterprise Value to Revenue Multiple benchmark? In general, a good EV/R Multiple is between 1x and 3x. However, public SaaS companies range between 6X and 12X EV/R.

The enterprise value-to-revenue (EV/R) is easily calculated by taking the enterprise value of the company and dividing it by the company's revenue.

The EV/R multiple reflects whether a company overvalues or undervalues or its stocks or whether its valuation is fair. If a company's theoretical enterprise value is high in proportion to its actual revenue, its ratio is large, meaning it's overvalued.

A lower EV/sales multiple indicates that a company is a more attractive investment as it may be relatively undervalued. This measurement is considered more accurate than the related price-to-sales because EV/sales takes into account a company's debt load.

EV-to-Revenue multiples are typically considered healthy when between 1x and 3x. If this ratio is higher, then it's considered that the stocks are over-valued, and it's not profitable for investors to invest in the company. Investors are most likely to not get any returns from this investment.

For every dollar of revenue, there is a large amount of enterprise value. A high ratio is generally not appealing to investors, as they will not benefit from the investment immediately. A high EV/Sales ratio often means the company is overvalued.

Enterprise multiple, also known as the EV-to-EBITDA multiple, is a ratio used to determine the value of a company. It is computed by dividing enterprise value by EBITDA.

What is the Formula for the EBITDA Multiple? To Determine the Enterprise Value and EBITDA: Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) – (cash and cash equivalents) EBITDA = Earnings Before Tax + Interest + Depreciation + Amortization.

A revenue multiple measures the value of the equity or a business relative to the revenues that it generates. As with other multiples, other things remaining equal, firms that trade at low multiples of revenues are viewed as cheap relative to firms that trade at high multiples of revenues.

One advantage of the EV/EBITDA ratio is that it strips out debt costs, taxes, depreciation, and amortization, thereby providing a clearer picture of the company's financial performance.

What does a negative EV EBITDA multiple mean? ›

Simply put, a negative enterprise value means that a company has more cash than it would need to pay off any debt and buy back all its stocks in one go, if it really wanted to.

The thumb rule is that a company with lower EV/EBITDA is more attractive. The condition is that the debt should not be high-cost debt and the equity must be fairly valued in the market.

Therefore, the relevant denominator must be computed after interest, preferred dividends, and minority interest expense. For example, an EV/Net Income multiple is meaningless because the numerator applies to shareholders and creditors, but the denominator accrues only to shareholders.

EV to Sales Ratio is the valuation metric used to understand the company's total valuation compared to its sale. It is calculated by dividing the enterprise value (Current Market Cap + Debt + Minority Interest + preferred shares – cash) by its annual sales.

The EV/Revenue Multiple is a ratio that compares the total valuation of a firm's operations (enterprise value) to the amount of sales generated in a specified period (revenue). Generally, the EV/Revenue multiple is used for companies with negative or limited profitability.

How Do You Calculate Enterprise Value? Take the number of outstanding shares from a company's balance sheet and multiply it by the current share market price. Then, subtract the value of cash and cash equivalents (also found on the balance sheet), and you have its EV.

Usually, a low EV/EBITDA ratio could mean that a stock is potentially undervalued while a high EV/EBITDA will mean a stock is possibly over-priced. In other words, the lower the EV/EBITDA, the more attractive the stock is. Generally, EV/EBITDA of less than 10 is considered healthy.

In practice, the EV/EBITDA multiple is the most commonly used, followed by EV/EBIT, especially in the context of M&A. The P/E ratio is typically used by retail investors, while P/B ratios are used far less often and normally only seen when valuing financial institutions (i.e. banks).

Generally, the multiple used is about four to six times EBITDA. However, prospective buyers and investors will push for a lower valuation — for instance, by using an average of the company's EBITDA over the past few years as a base number.

Rent revenue. Dividend revenue. Interest revenue. Contra revenue (sales return and sales discount)

What is a 3x multiple? ›

A company with a 3x multiple, implies an annual future return of 1/3 or 33.3% per year. A company with a 5x multiple implies an annual future return of 1/5, or 20% per year.

A multiple is simply a ratio that is calculated by dividing the market or estimated value of an asset by a specific item on the financial statements.

A healthy EV/EBITDA ratio for a company is less than 10. It can also indicate that a stock may be undervalued.

An EBITDA margin of 10% or more is considered good. For example, Company A has an EBITDA of $800,000 while their total revenue is $8,000,000. The EBITDA margin is 10%.

Since EV/EBITDA is a valuation metric, lower enterprise multiple can be indicative of the company being undervalued. Usually, EV/EBITDA values below 10 are seen as desirable (undervalued).

The higher the EBIT/EV multiple, the better for the investor as this indicates the company has low debt levels and higher amounts of cash. The EBIT/EV multiple allows investors to effectively compare earnings yields between companies with different debt levels and tax rates, among other things.

The EV/EBIT ratio is a very useful metric for market participants. A high ratio indicates that a company's stock may be overvalued.

EV to EBITDA Ratio – Industry Benchmarks

A high EV/EBITDA multiple implies that the company is potentially overvalued, with the reverse being true for a low EV/EBITDA multiple. Generally, the lower the EV-to-EBITDA ratio, the more attractive the company may be as a potential investment.

Usually, a low EV/EBITDA ratio could mean that a stock is potentially undervalued while a high EV/EBITDA will mean a stock is possibly over-priced. In other words, the lower the EV/EBITDA, the more attractive the stock is. Generally, EV/EBITDA of less than 10 is considered healthy.

What does EV EBITDA multiple tell you? ›

The enterprise multiple, which is enterprise value divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), looks at a company the way a potential acquirer would by considering the company's debt.

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.

It takes into consideration growth and profit. In terms of interpreting the rule, 40% is the baseline figure where the company is deemed healthy and in good shape. If the percentage exceeds 40%, then the company is likely in a very favorable position for long-term growth and profitability.

EBITDA margin = EBITDA / Total Revenue

The margin can then be compared with another similar business in the same industry. An EBITDA margin of 10% or more is considered good.

Analysis. Tesla's latest twelve months ev / ebitda is 35.4x. Tesla's ev / ebitda for fiscal years ending December 2017 to 2021 averaged 151.3x. Tesla's operated at median ev / ebitda of 147.8x from fiscal years ending December 2017 to 2021.