Sense-Checking the Price/Sales Multiple in Valuation

Valution of your company using the revenue multiple.

I do agree to some extent when valuations start to go crazy and people start to work backwards justify valuations based on 1,000x multiples.

But as they say a fair value will be that exchanged between willing buyer and willing seller.

I say Caveat Emptor.

Lets share ideas on how and why Price-Sales Multiples are increasingly used, and how to decide when is the right time to use and not use them.

Revenue multiples are very popular now because unlike earning and book-values, revenue multiples are available even for the most trouble firms and for very young firms.

The biggest disadvantage when we focus only revenues is it can seduce you into giving high values to firms that are generating high revenue growth while losing truck-loads of money (e.g. Uber, Snap, Twitter and Amazon of course)

Let me help you by introducing another metric which can assist you in determining whether the business is worth what the revenue multiple is suggesting.

Operating Margins

Students of value-investing will understand that the value of the company lies in its ability to generate cashflows, and its moat to keep out the competition.

I am too a student of Warren Buffet and Benjamin Graham.

However, in today's world where it doesn't matter so much if the company is making money or will ever make money.

The Price-to-Sales multiple to me makes sense as a single point of valuation only if you feel qualitatively that the Company has such a strong competitive advantage to the point of it becoming a monopoly.

Look at Amazon.