Is it normal for a company to be valued at the same $ as its revenues?
For example. Let’s say the company has revenues of $500 and a ebitda margin of about 10%. Median ebitda multiple of that sector is around 10x. Is it normal for the company to be valued the same as it’s revenues?
Yes. That is normal.
If a company is generating consistent EBITDA and their valuation is LOWER than revenue then usually it's a crap business. An example is Wish.
No…. it’s totally sector and stage dependent.
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Yeah. There's a sector I have a portco in where most of the add-ons we speak to expect a valuation of 1x sales to sell to us.
Yes, can even be less than 1x. TD recently bought Cowan for ~60% of their 2021 revenues and it was considered a great deal for both parties - very low-margin business, high fixed expenses (comp), little synergy potential. Quality business, just the nature of what's below the revenue line is what drives such a low valuation
Distributors can be another example of low margin business, that trade below 1x. Look at Sysco
Easiest framework is just to think of really low margin businesses - grocery, pharmacy, things like that. If you only keep 2 cents on every dollar you sell, I don’t really want to pay you 50x EBITDA (or 1.0x revenue) - but your business is still worth something.
Kroger prints billions in cash every year, but it takes them well over a hundred billion in sales to do it. What’s that worth? Quick check says the market thinks it’s worth $50B TEV - a big company - but that’s only about 8x EBITDA or 0.4x Revenue (5% margin).
Same idea if the operating margins are higher but there’s lots of CapEx impacting cash flow.
Why does the margin effect the multiple you'd be willing to pay? I mean the multiple is slapped on an absolute dollar amount of EBITDA, no? Wouldn't this scenario of paying a lower multiple be more applicable to companies with lower ROIC style metrics, implying a relatively poorer ability to reinvest internally generated capital, as opposed to the margins in a vacuum?
The point is that, because EBITDA (or more precisely FCF) is what ultimately matters, a lower margin business will trade at a lower multiple of revenue.
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