Every investor needs to know these 12 valuation ratios (2024)

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1. EV / Revenue

EV / Revenue, also referred to as Revenue Multiple, Sales Multiple, or EV to Sales Multiple measures the dollars in Enterprise Value for each dollar of revenue. High-profit margins are highly correlated with higher revenue multiples. Revenue multiples are especially useful when a firm has negative EBITDA or EBIT, as might be the case with rapidly growing companies or successful internet startups. They also are the least susceptible to accounting differences between otherwise similar businesses.

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2.EV / EBITDA

EV / EBITDAalso referred to as EBITDA Multiple is the most popular enterprise value multiple. EBITDA multiple measures the dollars in Enterprise Value for each dollar of EBITDA (SeeEBITDAfor benefits). Firms with high growth rates typically trade at higher EBITDA Multiples.

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3.EV / EBIT

EV / EBITis also referred to as EBIT Multiple, and measures the dollars in Enterprise Value for each dollar of EBIT. When capital expenditures are a significant consideration for the business, EBIT multiples may be better at capturing the value of capital efficiency. Subtracting D&A does, however, make EBIT susceptible to differences in depreciation and amortization policies.

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4.EV / Invested Capital

EV / Invested Capitalmeasures the dollars in Enterprise Value for each dollar of capital invested by shareholders and lenders. The invested capital multiple is especially useful when capital assets are a key driver of revenue and earnings. Stocks trading at high multiples of invested capital may also be more susceptible to competition, since investing in similar assets will be attractive to investors.

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5.EV / (EBITDA – CapEx)

EV / (EBITDA – CapEx)also referred to as EBITDA minus CapEx Multiple is similar to the EBIT multiple. EBITDA less CapEx is better at capturing value differences for growing companies since accounting for capital expenditures is less subjective than depreciation. When capital expenditures are cyclical or lumpy, analysts compute this ratio using the three-year average capital expenditures in the denominator.

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6.EV / Free cash flow

EV / Free Cash Flow measures the dollars in Enterprise Value for each dollar of free cash flow. The EV to Free Cash Flow multiple captures the working capital requirements of a business since cash inflows and outflows related to receivables and payables are reconciled in the cash flow statement.

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7.P/E Ratio

P/E Ratioor Price / Earnings ratio is the most popular equity value multiple; it indicates the multiple of earnings that stock investors are willing to pay for one share of the firm. The P/E Ratio is nonetheless susceptible to several pitfalls which thePE conundrumvideo by Khan Academy does a great job of explaining.

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8.Price / Sales

Price / Salescompares a firm’s equity value to the twelve months of booked sales. Like the EV to Sales, the Price to Sales multiple is primarily useful when valuing firms with negative or depressed earnings.

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9.Price / Book

Price / Bookor Price / Common Equity compares a firm’s market value of equity to the amount of common equity listed on the balance sheet. Price to Book ratio is commonly used to compare banks because most bank loan assets and deposit liabilities are constantly revalued to reflect their market values. This ratio is also popular with value investors, as it provides a rough indication of downside risk if the firm was to become bankrupt.

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10. Price / Tangible Book Value

Price / Tangible Book Valueor Price / Tangible Common Equity compares a firm’s market value of equity to its book value of tangible common equity value. Tangible common equity subtracts goodwill and intangibles from the listed total common equity since these assets often have little resale value in a bankruptcy. Tangible Equity gained popularity during the 2008–2009 economic crisis since it held banks and financial institutions to a stricter standard of balance sheet health from the perspective of common shareholders.

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11. Price / Cash Flow

Price / Cash Flowcompares a firm’s equity value to the Cash from Operations (OCF) reported on its Statement of Cash Flows. Investors often prefer to use Cash Flow vs. Net Income as the denominator, since it’s more difficult for management to skew OCF with clever accounting practices.

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12. PEG Ratio

The Price-Earnings to Growth abbreviated asPEG Ratiois a crude heuristic used to measure the level of earnings growth reflected in a stock’s market price. The benchmark for the PEG ratio is 1, and stocks with a PEG under 1 are considered undervalued. Similarly, those with a PEG greater than 1 are considered overvalued. Note, though this ratio is very popular, it provides a rough approximation of intrinsic value at best.

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