When should revenue multiples be preferred over EBITDA multiples?

The preference for revenue multiples over EBITDA multiples is particularly relevant when evaluating companies that have negative profits or negative EBITDA. In such cases, traditional profitability metrics like EBITDA become less useful, as they can obscure the underlying value of the business.

Revenue multiples provide a more stable basis for evaluation since they do not depend on the company's ability to generate profits or manage expenses. This is especially important in industries or scenarios where companies may be in early growth stages, facing temporary operational challenges, or investing heavily in growth initiatives. Using revenue as a metric allows investors and analysts to assess the potential of a business based on its sales performance rather than its profitability, which may not be reflective of its future potential.

In contrast, situations where a company has strong profit margins or a large market share tend to be more suited for EBITDA multiples, as these companies typically exhibit stable earnings that reflect their operational efficiency. Comparing companies within the same sector can also lean towards using EBITDA multiples, as these comparisons tend to focus on profitability metrics that are more relevant for firms with established earnings performance.