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If net profit is more important than gross revenue, why are companies valued at multiple of revenue instead of their profit?
by rokhayakebe 13y ago
If net profit is more important than gross revenue, why are companies valued at multiple of revenue instead of their profit?
- mikeryan 13y agoNet profit is not always more important than gross revenue (see Amazon) particularly for high growth companies. Growing companies should be re-investing their profits in continued expansion.
- kryptiskt 13y agoProfit is the primary objective of a company. Gross revenue is only interesting if there is reason to believe that more of it can be turned into profit, expanding margins. Companies can be valued after many criteria: innovation, market share, revenue, leadership etc. But the value of all of them is in their potential for generating future profits. The other fundamental method for valuation is to look at the balance sheet and value the company by net assets.
- marvin 13y agoBecause investors have no clue how to value growth companies, because interest rates are low and because some prominent growth companies with no profits have been on a non-stop* share price rampage for 14 years. The revenue multiple pricing of Amazon, Facebook, Twitter et.al. is cargo cult finance. No one really knows how much these companies will eventually earn, so some commentators have come up with a plausible after-the-fact metric that sounds good in a soundbite. A company is worth the present-value adjusted sum of all its future earnings, and that is it. How to guess, discount and risk-adjust this number is a different question.
- pbreit 13y agoUh, price-to-sales is pretty rare. "PE" or price-to-earnings is much more common. But a high growth company will likely prioritize growth over profits so PE not important.