EV/Sales

EV/Sales replaces EBITDA with revenue in the denominator, producing a multiple that works even when a company has no earnings to value against. It is the default lens for early-stage software, biotech, and any business whose income statement is intentionally suppressed by reinvestment. Its strength is also its weakness: revenue does not become free cash flow without a path to operating leverage, and a 15x EV/Sales multiple only makes sense if the business will eventually earn margins that produce a defensible per-share value. We use EV/Sales paired with a target steady-state operating margin assumption, then sanity-check what the implied EV/EBIT would be at maturity. If the implied steady-state multiple is higher than what comparable mature businesses trade at, the EV/Sales has run ahead of fundamentals. EV/Sales also varies enormously by industry — a 1.5x multiple is rich for a low-margin distributor and dirt cheap for a 30%-margin software platform — so cohort comparisons matter more than absolute thresholds. We avoid using EV/Sales as a primary lens for mature, capital-intensive businesses where the income statement is informative; for those, EV/EBITDA or EV/(EBITDA − Maintenance capex) is more discriminating.