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Valuation Ratios Comparison
Pros
Cons
EV/Sales
Widely used and understood
Depends on corporate structure
Quick and easy to source info and calculate
Accounting policies impact earnings
Useful to check DCF exit assumptions
EV/EBITDA
Incorporates profitability
Ignores depreciation, CAPEX, tax regimes, and
tax profiles
Expands comparable universe as most
companies are EBITDA positive
Does not account for varying EBITDA growth
rates
Ignores significant accounting differences from
goodwill
There may be inconsistencies in treatment of
EBITDA for joint ventures in different reporting
environments
Limited exposure to accounting differences
Other accounting differences such as revenue
recognition and operating leases
EV/EBIT
Incorporates profitability
Ignores depreciation, CAPEX, tax regimes, and
tax profiles
Useful for capital intensive businesses where
depreciation is a true economic cost
Does not account for varying EBITDA growth
rates
Good for companies in the same reporting
environment where accounting differences
are minimized
There may be inconsistencies in treatment of
EBITDA for joint ventures in different reporting
environments
Other accounting differences such as revenue
recognition and operating leases
EV/Sales
Suitable for companies with similar business
models/development stages
Does not address quality of revenues, varying
revenue growth rates, or profitability issues
Possibly the only performance-related multiple
available for companies with negative EBITDA
There may be inconsistencies in treatment of
sales for joint ventures in different reporting
environments
Useful for sectors with similar operating
margins between companies or where market
share is important
There may be different revenue recognition
rules between comparable companies
Limited exposure to accounting differences
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