When should revenue multiples be used over EBITDA multiples?

Revenue multiples are particularly useful in assessing companies with negative profits, as EBITDA multiples become less meaningful when a company is not generating positive earnings before interest, taxes, depreciation, and amortization. In such scenarios, relying on profit-based valuation metrics can lead to misleading conclusions or imply a value that may not represent the company's growth potential or operational efficiency.

Revenue multiples, on the other hand, focus on a fundamental driver of business value: sales. They can provide insight into how well a company is generating income irrespective of its current profitability status. This is especially relevant in industries or stages where companies may be investing heavily for growth, leading to temporary losses. Thus, in cases of negative profits, revenue multiples allow for a more informative comparison among companies and a clearer understanding of their market positions and potential.

While companies with consistent profits, mature technology companies, and those with high market shares may also benefit from valuation scrutiny using either revenue or EBITDA multiples, the focus on revenue multiples shines brightest when profits are negative. This context helps investors gauge potential recovery or growth trajectories based on sales rather than current profitability, making revenue multiples a more appropriate choice in such situations.