Posted in Finance, Accounting and Economics Terms, Total Reads: 678
Definition: Times Revenue Method
The Times Revenue method is a method of determining the value of a company. The method is used to determine the maximum value of a company or business by using a multiple of the current revenues. This maximum value is also called the ceiling.
For example, if the revenue for the current year for a company is $1 million, the Times Revenue method makes use of a multiple to calculate the maximum sales revenue for determining the value of the company. Typically, businesses are valued within a range that is determined by one times the sales revenue and two times the sales revenue. In other words, the company can be valued between $1 million and $ 2 million depending on the multiple chosen. The value of the multiple used for evaluating the company’s value using the Times Revenue method is influenced by a number of factors including the macroeconomic environment, industry conditions, etc.
The Times Revenue method is useful for measuring the purchase price offered by the buyer. The value of the multiple can vary depending on the period for which the revenue is considered or on the method of revenue measurement employed. Revenue can be measured by using the trailing 12 month method, which is based on the historical performance of the company’s actual activity. This method may be inaccurate as it is not a reliable measure of the current real value of the company. Revenue can also be measured by using pro-forma statements to account for the actual sales as well as future predictions.
The advantage of Times Revenue method is that it is useful for financial analysis wherein revenue is usually the independent variable and the values of other parameters can be manipulated for sensitivity analysis. The method however, is not accurate for valuation purposes as increase in revenues may not imply an increase in profitability.