What metric is commonly used in enterprise value multiples?

• A. Price / Earnings
• B. EV / Revenue
• C. Dividend Yield
• D. Market Capitalization

Answer: (B)

The metric that is commonly used in enterprise value multiples is EV/Revenue. This ratio provides a clear measure of how a company's total value compares to its revenues, making it particularly useful when assessing companies that may not yet be profitable.

Enterprise Value (EV) accounts for the total value of a company, including not just its market capitalization but also its debt, while subtracting cash and cash equivalents. This gives a more comprehensive view of the firm’s value in the context of its capital structure. By comparing EV to revenue, investors can gauge how much they are paying for each dollar of revenue the company generates, which is particularly relevant for companies in growth stages or those with varying profit margins.

This ratio is often used in valuation because it allows for the comparison of companies across various capital structures and is not skewed by how a company finances itself. It's particularly helpful in industries where companies may have similar revenues but different profit margins, allowing for a more equitable analysis of their valuation relative to their revenue-generating capability.