When should I use EV/Revenues instead of P/E or EV/EBITDA?

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AcadiFi · Accepted Answer

EV/Revenues is most appropriate when earnings and cash flows are negative or near zero...

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Advantages: (1) Revenue is rarely negative, so the multiple is always defined. (2) Revenue is less susceptible to accounting manipulation than earnings. (3) Useful for cross-company comparison when accounting choices (depreciation methods, capitalization policies) vary materially.

Disadvantages: (1) Ignores profitability and cost structure entirely. (2) A company with 20% margins and one with 2% margins trading at the same EV/Revenues is clearly not equivalently priced. (3) Revenue quality matters — recurring SaaS revenue deserves higher multiples than one-time project revenue.

For Lumen Analytics, a pre-IPO data platform: Revenue $85M, EBITDA −$12M, EV $425M. EV/Revenues = 5.0x. Peer SaaS median EV/Revenues is 6.5x, suggesting Lumen trades at a discount. But if peers have 30% gross margins and Lumen has 65% gross margins, Lumen should trade at a premium — the simple 5.0x vs 6.5x comparison is misleading.

Best practice: always accompany EV/Revenues with gross margin or rule of 40 (revenue growth + EBITDA margin). Adjust by regressing EV/Revenues against growth rates and margins to identify true mispricings. For very early-stage companies, bookings or ARR may be better than reported revenue due to timing of recognition.

When should I use EV/Revenues instead of P/E or EV/EBITDA?

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