EV / Revenue is another one of the most important valuation ratios used in investment banking and private equity, used alongside EV / EBITDA and P/E. It is an alternative to EV / EBITDA, but is used alongside it for public company and precedent transaction comparable analysis. However, because revenue is likely to vary widely between sectors, it can only be used to compare companies within a relatively narrow spectrum of a sector (i.e. hardware within the Technology sector).

EV / Revenue is written as a multiple and takes the form of something like 2.6 x.

EV / Revenue is taken in terms of financial years (after calendarization), usually for 2 historical and 2 projected years.

Similar to EV / EBITDA, EV / Revenue compares the actual price you would pay for a company (Enterprise Value) with the money generated by that company. In this case revenue is considered, i.e. income from product sales before any costs have been taken into account. Many people would dismiss this multiple in favour of EV / EBITDA because that one actually looks at profit-making ability which is usually all that investors are interested in, but this ignores the crucial aspect of margins.

To demonstrate this important difference and concept, consider two Amazon and eBay, two reasonably similar companies.

As at the close of 31 August 2012, they Amazon has the following financials:

  • Share Price - $248.27
  • Enterprise Value - $94.7bn
  • Revenue - $51.40bn
  • EBITDA - $1.82bn
  • EBITDA Margin - 3.5%
  • EV / Revenue - 1.8x
  • EV / EBITDA - 52.0x

and eBay has:

  • Share Price - $47.47
  • Enterprise Value - $57.5bn
  • Revenue - $13.0bn
  • EBITDA - $3.76bn
  • EBITDA Margin - 28.9%
  • EV / Revenue - 4.4x
  • EV / EBITDA - 15.3x

Just by looking at EV / EBITDA one would straightaway conclude that eBay is a much better value purchase but when you consider EV / Revenue, you see that Amazon is actually trading at a lower multiple. From knowing the two companies, you can say that it is probably easier for Amazon to decrease costs (and therefore decrease EV / EBITDA) than it is for eBay to increase revenues so for a long term growth prospect, it is not such a straightforward decision.

One could also say that Amazon is not a good company to invest in because anyone can make a company trading massive volume on razor-thin margins.

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