What is the Enterprise Value (EV) to Revenue Multiple?
The Enterprise Value (EV) 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 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
- EV (Enterprise Value) = Equity Value + All Debt + Preferred Shares – Cash and Equivalents
- Revenue = Total Annual Revenue
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?
- $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 because of the revenue before interest expense on the income statement, and therefore, represents income that’s available to all investors (debt and equity). Once interest expense is deducted, then the price or market cap would be used in the numerator, as with the price-to-earnings ratio.
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:
- 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
- does not take into account the company’s cost structure
- ignores profitability and cash flow generation
- hard to compare across different industries and different stages of companies (early vs. mature)
- results can be difficult to interpret
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 in CFI’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.
Thank you for reading this guide to EV/Revenue ratios. CFI is the official provider of the Financial Modeling & Valuation Analyst certification, which teaches on-the-job applications of finance to help anyone become a world-class financial analyst.
To continue learning on your own, these resources will be helpful: