Answers / M&A Advisory

Why might you use EV/Revenue instead of EV/EBITDA?

A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.

THE SHORT ANSWER

You reach for EV/Revenue when EBITDA isn't a meaningful denominator: the company is loss-making or has negative/near-zero EBITDA (early-stage, hyper-growth, turnaround), or EBITDA is distorted by heavy current investment or non-comparable accounting, so an EBITDA multiple would be meaningless or wildly high. It's common for SaaS and high-growth tech where revenue is recurring and predictable but margins are deliberately suppressed by growth spend that will normalize later. Its big weakness is that it ignores profitability and capital intensity entirely — two firms on the same EV/Revenue can have very different margins and cash conversion — so you only use it where margins are expected to converge to a comparable level, and ideally alongside a forward EBITDA multiple and unit economics (e.g., rule-of-40, gross margin). So it's a pragmatic fallback for pre-profit or distorted-EBITDA cases, not a substitute for profitability-based valuation where EBITDA is reliable.

WHAT INTERVIEWERS LISTEN FOR

  • ✓Use when EBITDA is negative, near-zero, or distorted
  • ✓Common for SaaS/high-growth where margins are suppressed by growth spend
  • ✓Weakness: ignores profitability and capital intensity
  • ✓Only valid where margins converge; pair with unit economics/forward EBITDA

COMMON MISTAKES

  • ✗Using EV/Revenue when reliable EBITDA exists
  • ✗Ignoring that it omits profitability
  • ✗Comparing firms with very different margins on it

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