Revenue Multiples vs. EBITDA Multiples
The Revenue Multiples and Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) Multiples are commonly used in a valuation or pricing analysis when determining the Enterprise Value (EV) of a business. However, one should be aware of there are limitations to these multiples and there should not be used as sole metric in a valuation or pricing analysis.
Some of the reasons are as follows:
Revenue Multiples (EV / Revenue)
Revenue by itself does not provide a full picture of how the business is performing - in terms of overall profitability and cash flow, which are equally important and crucial for a business to grow and maintain as a going concern.
It does not take into account of operating working capital needs that can impact future cash flow.
The value of a business is most often then not impacted by its growth potential, which the revenue multiples (trailing) does not take into account.
EBITDA Multiples (EV / EBITDA)
EBITDA does not reflect the need for capital expenditures (CAPEX), which are essential for growing and maintaining a business.
Using historical EBITDA as proxy for future cash flows are poor predicting indicator as it does not take into consideration of market conditions and future company improvement.
EBITDA does not take into account of business risk such as operating leverages of debt that can help grow the business.
As such, the appropriate way to use such multiples is to use various corroborative metrics and taking into account of asset-specific characteristics, industry dynamics and macroeconomic factors, to determine the value of a business or an asset.