What is the appropriate numerator for a revenue multiple?

What is the appropriate numerator for a revenue multiple?

• A. Market Capitalization
• B. Revenue
• C. Earnings Before Interest, Taxes, Depreciation and Amortization
• D. Enterprise Value

Answer: (D)

The main idea here is how a revenue multiple is formed. In a revenue multiple you’re relating a company’s total value to its revenue, and the standard form uses Enterprise Value in the numerator. Enterprise Value captures the entire value of the business—equity plus debt minus cash—so it reflects what it would cost to acquire the operating entity as a whole. Using only market capitalization would miss debt and cash, causing comparisons to skew for firms with different capital structures. A different multiple, like EV/EBITDA, uses EBITDA in the denominator, so the option that would flip the numerator to match that structure isn’t correct for a revenue multiple. Putting revenue in the numerator wouldn’t provide a meaningful, comparable multiple of firm value to top-line revenue. So the appropriate numerator is Enterprise Value.

The main idea here is how a revenue multiple is formed. In a revenue multiple you’re relating a company’s total value to its revenue, and the standard form uses Enterprise Value in the numerator. Enterprise Value captures the entire value of the business—equity plus debt minus cash—so it reflects what it would cost to acquire the operating entity as a whole. Using only market capitalization would miss debt and cash, causing comparisons to skew for firms with different capital structures. A different multiple, like EV/EBITDA, uses EBITDA in the denominator, so the option that would flip the numerator to match that structure isn’t correct for a revenue multiple. Putting revenue in the numerator wouldn’t provide a meaningful, comparable multiple of firm value to top-line revenue. So the appropriate numerator is Enterprise Value.