What Is Multiple of Sales?

Multiple of sales is a measure of the value of a company relative to its total revenue. It looks at a company’s current performance in terms of sales and uses this figure to compare it to the value of the company. This is quite useful for investors and business owners to look at and understand the relationship between a company’s value and its current level of sales.

How Is Multiple of Sales Figured?

To calculate multiple of sales, you take the company’s value and divide it by the total sales figures for that same company. The number obtained is then expressed as a multiple. For example, if a company has a value of $400 million and total sales of $90 million, the multiple of sales would be 4.4x. So, for every $1 of sales, the value of the company is $4.4.

What Is the Interpretation of Multiple of Sales?

The interpretation of multiple of sales is two-fold.

Firstly, it can be used to compare the value of a company to others in the industry. A company with an unusually high multiple of sales in comparison to its competitors may be a good opportunity for investors, while a company with an unusually low multiple of sales may not be worth the risk.

Secondly, it can also be used to assess a company’s performance over time. If the multiple of sales is increasing, it indicates that the value of the company is increasing faster than its sales figures, which is a good sign. Conversely, a decreasing multiple of sales shows that the value of the company is not keeping pace with its sales and is a sign of potential trouble.

Conclusion

In conclusion, multiple of sales is a useful metric to assess a company’s value relative to its current performance in terms of sales. By understanding what it measures and interpreting it properly, investors and business owners can gain valuable insights into the value of the company and its potential for future growth.