See: Revenue Multiple.
It's a valuation methodology that bankers and investors use to value companies that have low or no earnings...or earnings which aren't reflective of the valuation of the company. So they take whatever the revenues are of the company...let's say it's a $100 million revenue airline (small one) which has $5 million in earnings and is growing 20% a year (fast for an airline). Well, at 20x earnings, the company gets a valuation of one times revenues.
Now take a software company that's growing revenues 30%. It also has $100 million in revenues, but way higher profit margins of 25%. So, at 30x that $25 million in earnings, the company trades at $750 million, or 7.5x revenues.
Big multiple. The revenue multiple helps simplify things. A lot.
Related or Semi-related Video
Finance: What are Revenues?73 Views
finance a la shmoop what are revenues? well revenues are this magical thing.
they happen when you sell stuff from your business. 14 opera singing [man shrugs]
Teddy bears, forty bucks each five hundred sixty dollars. total nine custom-built
Japanese body pillows eighty bucks each seven hundred twenty dollars total. a
business so weird you can't tell your family and friends about it? [man peeks from behind a door]
priceless. revenues are what Wall Street analysts call top-line. because on an
income statement shows up right here. seems simple right? but from an
accounting perspective revenues get recognized in different ways. like let's [accounting document shown.]
say you sell a season pass to a golf course for five hundred bucks. on this
golf course happens to be somewhere in the Arctic Circle so the season is only
five months long. unless you like playing in the snow and stressing about hungry
polar bears and are basically a complete idiot. so the customer pays you five [man golfs in the snow]
hundred bucks up front to play as much as they want on your course. you made the
sale of five hundred dollars on May 1st, the first day of the season, but are
those all recognized as revenues that day? well it depends if there is no [definitions on screen]
money-back guarantee and you keep the five hundred bucks no matter what, well
then maybe yeah. you can recognize all of those revenues then upfront and you're
done. but what if there's a fine print that [man and woman exchange documents]
says if you play zero times in a month well you don't have to pay for that
month and you get a refund at the end of the season in October.
well you can't recognize the revenue upfront now, at least not all of it. [ATM machine]
instead you can recognize a hundred dollars worth of revenues each time
someone clearly plays on your course. ie even one round of golf confirms that
they have used the hundred dollar all-you-can-eat in a month deal on your
course. you can imagine then that well you have to reserve some kind of money [man drives golf cart]
back refund set of payments when the season is over and you just have to
track every single season and pass fires progress on your golf course. all right
well the key idea here is that revenues don't necessarily equal sales,
and that recognizing revenues usually entails that the revenues are [man smiles from golf course]
irrevocable. that is they have passed their money-back guarantee period and
will remain in your little piggy bank until next season. and what do you do
with all those revenues? well ever hear of polar bear repellent? yeah will do [people run from polar bear]
wonders for customer retention rates.
Up Next
What are revenue multiples? Revenue multiples are a metric used to evaluate a company’s maximum worth at the moment relative to its industry. A c...