Module II· Trading ComparablesIntermediate
Question
When do you use EV/Sales instead of EV/EBITDA, and what are the risks?
Answer
When to use EV/Sales:
- Pre-profitability companies (negative or volatile EBITDA — SaaS, biotech).
- Sectors with large margin differences between comps (e.g. SaaS with different R&D investment).
- Early-stage growth, where the profit trajectory is uncertain. Standard EV/Sales multiples: SaaS 5−15x, industrials 1−3x, retail 0.3−1.5x. Risks: (1) it ignores margin differences entirely — a target with a 30% EBITDA margin gets the same sales multiple as a comp with 10%. (2) it invites 'hype valuations' (as in the tech bubbles of 2000 and 2021).
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Pitch tip
With EV/Sales, always show EV/Sales / EBITDA margin as a 'quality-of-multiple' check. If the target trades at 5x EV/Sales on a 30% EBITDA margin and a comp trades at 5x EV/Sales on a 15% margin − the target is clearly undervalued.