Equity & Ownership

Revenue Multiples

Understand revenue multiples, which value a business on its sales (enterprise value ≈ revenue × a multiple) when it has too little profit for an earnings multiple, and see why, because revenue says nothing about profitability, they're cruder, riskier, and prone to over-valuation unless paired with a credible margin story.

  • Intermediate
  • 16 min total
  • 13 chapters

What decision this helps you make: When to use a revenue multiple (too little profit for an earnings multiple), and why to always ask what margin the revenue will earn.

What this topic is

A revenue multiple values a business as enterprise value ≈ revenue × a multiple, on its sales rather than its earnings. It's used when a business has little or no profit (e.g., fast-growing startups), so an EBITDA multiple can't be applied.

Why it matters

It's far cruder and riskier than an earnings multiple, because revenue says nothing about profitability: it implicitly bets the revenue will become profit at some margin. So it's prone to over-valuation in hot markets, and must be paired with a credible margin story.

Who should learn it

Anyone valuing (or investing in) a fast-growing, low-profit business.

What you will understand

  • Understand a revenue multiple as valuing sales, not earnings, used when there's too little profit
  • See why revenue says nothing about profitability: the core weakness
  • Know it implicitly bets the revenue will become profit, so it's prone to over-valuation
  • Always ask what margin the revenue will earn, and how credible the path is

Prerequisites

Common misconception

"A high revenue multiple means the business is hugely valuable." Not necessarily. A revenue multiple values sales, not profit, and revenue says nothing about profitability. It's used when a business has too little profit for an earnings multiple, and it implicitly bets the revenue will become profit at some margin. If that never happens, because costs scale with revenue or the market never allows profit, then the revenue was never worth the multiple. This is why revenue multiples are prone to over-valuation in hot markets (bubbles). Always ask: what margin will this revenue earn, and how credible is the path?