EV to Sales

EV/Sales compares Enterprise Value with a company's revenue. This multiple is mainly used when a company does not yet generate profit. It shows at what multiple of its revenue the company is valued. Its field of application follows from practical necessity: for companies with negative or highly volatile earnings, earnings-based factors give no meaningful values, while revenue remains a stable and hard-to-manipulate reference. That is also its weakness, because revenue says nothing about profitability: a trading company on a three percent margin and a software company on 30 percent can post identical revenue and are obviously worth entirely different amounts.

The multiple is therefore meaningful only within a very similar peer group and is always considered together with growth and gross margin. In software businesses it is often applied not to reported revenue but to annual recurring revenue, which produces an EV/ARR multiple and excludes one-off items. The achievable multiples then depend heavily on growth rate, retention and gross margin. The rule of 40 provides an additional measure, combining revenue growth with a profit or cash flow margin.

In valuing mature companies the revenue multiple plays hardly any role and serves at most as a rough plausibility check alongside earnings-based methods. The definition of the revenue figure is decisive in application, because for software companies reported revenue, annual recurring revenue and revenue adjusted for one-off items differ considerably. A factor without a stated reference is unusable. The time reference also matters, since a factor on the coming twelve months is markedly lower for fast-growing companies than the same price applied to the last twelve months.