Revenue Multiple Valuation: When Investors Use Price-to-Sales
Revenue multiple valuation explained: when investors use price-to-sales, how to interpret revenue multiples, and what to watch out for.
What is a revenue multiple?
A revenue multiple values a company based on revenue (sales), often used when earnings are temporarily depressed or not meaningful. Common forms include Price-to-Sales (P/S) and Enterprise Value-to-Revenue.
When investors use it
- Early-stage or cyclical companies with noisy earnings
- Asset managers and fee-based businesses (sometimes)
- As a quick relative valuation cross-check
Revenue multiples can mislead if margins are weak or deteriorating. Always pair with profitability and unit economics.
Screen with fundamentals included
Use screening filters for profitability and leverage so revenue multiples aren't used in isolation.
FAQs
Is a low price-to-sales ratio always good?▼
No. It can reflect low margins, weak growth, or high risk. Evaluate profitability and business quality alongside multiples.
What's the main downside of revenue multiples?▼
They ignore profitability and capital intensity. Two companies with the same revenue can have very different cash flows.
Related
Intrinsic Investor is for education and research only. Not financial advice.