Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, Third Edition

CHAPTER 20

Revenue Multiples and Sector-Specific Multiples

While earnings and book value multiples are intuitively appealing and widely used, analysts in recent years have increasingly turned to alternative multiples to value companies. For young firms that have negative earnings, multiples of revenues have replaced multiples of earnings. In addition, these firms are being valued on multiples of sector-specific measures such as the number of customers, subscribers, or even web site visitors (for new economy firms). In this chapter, the reasons for the increased use of revenue multiples are examined first, followed by an analysis of the determinants of these multiples and how best to use them in valuation. This is followed by a short discussion of the sector-specific multiples, the dangers associated with their use and the adjustments that might be needed to make them work.

REVENUE MULTIPLES

A revenue multiple measures the value of the equity or a business relative to the revenues that it generates. As with other multiples, other things remaining equal, firms that trade at low multiples of revenues are viewed as cheap relative to firms that trade at high multiples of revenues.

Revenue multiples have proved attractive to analysts for a number of reasons. First, unlike earnings and book value ratios, which can become negative for many firms and thus not meaningful, revenue multiples are available even for the most troubled firms and for very young firms. Thus, the potential for ...