Times-Revenue Method
Candlefocus EditorThe times-revenue method uses revenue as the only metric in valuing a company. This method of valuation is used by many prospective buyers to estimate the value of a company when they consider an acquisition. In such a situation, the buyer will estimate the value of the company they are considering buying by calculating the times-revenue multiple in the same market based on the revenue of the target company.
This method ignores the actual business profits, current and future earning potential, liabilities, and the accumulation of intangible assets, such as the company's brand and its production process. This can sometimes make buying a company for its historic revenue misleading since it does not take into account the firm's future prospects. Additionally, it can also be difficult to find reliable figures for revenue as some companies may be trying to manipulate or hide their true financials.
In conclusion, the times-revenue method is a relatively straightforward way to assign a value to a company. However, it often does not take into account the complexities of a business, such as its future earning potential, liabilities, and intangible assets. For these reasons, it is often seen as inadequate in determining the true value of a company and can therefore be misleading. Consequently, the times-revenue method should be used as only one method of assessing a company, alongside other valuation metrics.