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.
To learn more about this concept and become a master at valuation modeling, you should check out our Valuation Modeling Course. Learn more here.
Module 1: Introduction
Module 2: Valuation: The Big Picture
Module 3: Enterprise Value & Equity Value Practice
Module 4: Trading Comparables Introduction
Module 5: Trading Comps: The Setup
Module 6: Trading Comps: Spreading Nike (NKE)
Module 7: Trading Comps: Spreading Adidas (ADS.DE)
Module 8: Trading Comps: Spreading Lululemon (LULU)
Module 9: Trading Comps: Spreading Under Armour (UA)
Module 10: Trading Comps: Benchmarking and Outputs
Module 11: Precedent Transactions: Introduction
Module 12: Precedents: The Setup
Module 13: Spreading Tiffany & LVMH
Module 14: Spreading FitBit & Google
Module 15: Spreading Reebok & Adidas
Module 16: Spreading Jimmy Choo & Michael Kors
Module 17: Spreading Dickies & VF
Module 18: Valuation Wrap-Up
Module 19: Bonus: Non-GAAP Practice
- Comparable Analysis
- Enterprise Value (EV)
- Precedent Transactions
- Public Comparable Companies
- Trading Multiple