Revenue Multiple

Revenue multiples are a way of assessing the value of a company, when that company has no profits, volatile profits, or is just growing at a really fast and unpredictable pace.

Why use revenues as a proxy to value a company?

Because revenues are generally a whole lot more stable than profits. Like..a company might be in a cyclical commodity area, like washing machine sales, which sell a lot in good-time economies, and, uh not so much in bad ones. So Shmooptag Washers might have revenues of $2 billion…$2.5 billion…$2.3 billion...then $2.8 billion...and then $3.2 billion...with profits of $200 million...$500 million...a loss of $100 million…a gain of $300 million…and then $600 million.

Profits are alllll over the place. So if you tried to just slap a price-to-earnings ratio on this washing machine company of, say 15x, you’d get a value of the company that was equally all over the place.

Like $3 billion, then $4.5 billion, then, uh…negative $1.5 billion? Can you do that? Can you value a company “less than zero”? Uh..no. Then $4.5 billion again...hello we missed you, and then $9 billion.

Note that the valuations, based on these slapped-on 15x numbers, hover very roughly around $4-and-a-half billion and change. And that number is about 2-ish times revenues. And that 2-ish number will help a lot with the value of the company in bad economic times, when they’re actually losing money. At 2 times revenues, even in the worst of times, the Shmooptag company is worth $4 bil and change.

Why? Because investors presume that some day Shmooptag will again be selling washers, and they value the business based on a discount attached to the sum total of their future earnings power, year after year after year. In the meantime, pretty much all you can do is, uh…sit and spin.