Enterprise Value to Revenue (EV/Revenue)

EV/Revenue extends the price-to-sales concept to the enterprise level by replacing market cap with enterprise value. This accounts for the company's debt and cash position, making it more accurate for comparing businesses with different capital structures.

EV/Revenue is the go-to metric for valuing high-growth companies that are not yet profitable. Because it sits at the top of the income statement (revenue), it is unaffected by margin differences, cost allocation choices, or capital structure.

The tradeoff is that EV/Revenue tells you nothing about profitability. Two companies at 3x EV/Revenue may look equally priced, but one with 40% EBITDA margins is far cheaper on an earnings basis than one with 5% margins.

Lower EV/Revenue suggests cheaper valuation per dollar of sales. For profitable companies, an EV/Revenue below 2x is often attractive.

EV/Revenue is most useful as a relative metric - comparing peers within the same industry where margin structures are similar. Across industries, it requires adjustment for margin differences.

When combined with gross or EBITDA margins, EV/Revenue becomes much more informative. A company at 5x EV/Revenue with 80% gross margins (effectively 6.25x EV/Gross Profit) may be cheaper than one at 2x EV/Revenue with 20% gross margins (10x EV/Gross Profit).

SaaS and cloud companies often trade at 5-20x EV/Revenue due to recurring revenue models, high gross margins, and strong growth. Below 5x can signal relative value in this sector.

Industrial and manufacturing companies typically trade at 0.5-2x EV/Revenue, reflecting thin margins and capital intensity.

Retail trades at 0.2-1.5x EV/Revenue. Grocery and discount retail sit at the low end; luxury retail at the high end, reflecting margin differences.