When looking at investing in growth companies that do have impressive revenue growth rates, however don’t produce a profit yet, what sort of simple valuation ratios can I look at?

When looking at investing in growth companies that do have impressive revenue growth rates, however don’t produce a profit yet, what sort of simple valuation ratios can I look at. I assume its Price to Revenue and EV to Revenue are some of the metrics you look at.

Can you inform me if there are others and also with the two I mentioned what would be considered on the upper end of the scale in terms how expensive they are. For example would Price to Revenue of 25 and EV to Revenue of 23 consider being extremely expensive?

I am looking at AD8 and trying to get a grasp on a relative basis is share price stretched and I am looking for a few markers and tips on how to evaluate such growth companies.

A: EV/Revenue (sometimes  sales or gross profit, depends on the industry)

EV/EBITDA

Those multiples you quoted look high – I was recently involved in a $2bn business that IPOed at a multiple of EV/Forecast FY22 revenue of 13.4x

Multiples are very much industry specific. Further, the faster the growth rate, typically the higher the multiple. So a business that is growing revenue at 30% might trade on a EV/Revenue multiple of 20x, whereas a business growing at 10% pa might trade on a multiple of 8x


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