# Times-Revenue Method: Calculating Company Value From Revenue

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*— Investopedia / Julie Bang*

## What Is the Times-Revenue Method?

The Times-Revenue Method evaluates a company's worth by applying a multiple to its revenue over a specific period. This method offers a straightforward approach to estimating business value, though it doesn't account for expenses or profitability. It's frequently used for young firms with volatile earnings or in high-growth sectors.

The multiple varies by industry and other factors but is typically one or two. In some industries, the multiple might be less than one.

### Key Takeaways

*   The times-revenue method values a company by multiplying its annual revenue by a factor, often between one and two.  
    
*   This method is easy to calculate but can be misleading as it does not account for a company's expenses or profitability.  
    
*   It is most useful for valuing young companies with unpredictable earnings or those expected to see rapid growth.  
    
*   Valuations can vary significantly between industries, reflecting differing growth potentials and risks.  
    
*   A notable drawback of this approach is its reliance on historical data, which cannot accurately predict future performance.

## How the Times-Revenue Method Works

The value of a business might be determined for various reasons, including to aid financial planning or in preparation for selling the business.

It can be challenging to calculate the value of a business, especially if the value is largely determined by potential future revenues. Several models can be used to determine the value, or a range of values, to facilitate business decisions.

The times-revenue method attempts to value a business by valuing its cash flow.

The times-revenue method is used to determine a range of values for a business. The figure is based on actual [revenues](https://www.investopedia.com/terms/r/revenue.asp) over a certain period of time (for example, the previous fiscal year). A multiplier provides a range that can be used as a starting point for negotiations.

The multiplier used in business valuation depends on the industry.

Small business valuation often involves finding the absolute lowest price someone would pay for the business, known as the "floor." This is often the [liquidation value](https://www.investopedia.com/terms/l/liquidation-value.asp) of the business's assets. Then, a ceiling is set. This is the maximum amount that a buyer might pay, such as a multiple of current revenues.

Once the floor and ceiling have been calculated, the business owner can determine the value, or what someone may be willing to pay to acquire the business. 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 and industry conditions.

> **Important**
>
> The times-revenue method is also referred to as the multiples of revenue method.

## Ideal Candidates for the Times-Revenue Method

The times-revenue method is ideal for young companies with earnings that are volatile or non-existent. Also, companies that are poised to have a speedy growth stage, such as software-as-a-service firms, will base their valuations on the times-revenue method.

The multiple used might be higher if the company or industry is poised for growth and expansion. Since these companies are expected to have a high growth phase with a high percentage of [recurring revenue](https://www.investopedia.com/terms/r/recurringrevenue.asp) and good margins, they would be valued in the three- to four-times-revenue range.

The multiplier might be one if the business is slow-growing or doesn't show much growth potential. A company with a low percentage of recurring revenue or consistently low forecasted revenue, such as a service company, may be valued at 0.5 times revenue.

## Limitations of the Times-Revenue Method

The times-revenue method is not always a reliable indicator of the value of a firm. Revenue doesn't mean profit, and the times-revenue method ignores a company's expenses or whether it's generating net income.

Moreover, an increase in revenue does not necessarily translate into an increase in profits. A company might see 10% growth in revenue each year but have expenses rise by 25%.

Valuing a company only on its revenue stream fails to consider what it costs to generate its revenue.

To get a more accurate picture of the current real value of a company, earnings must be factored in. Thus, the multiples of earnings, or [earnings multiplier](https://www.investopedia.com/terms/e/earningsmultiplier.asp), is preferred to the multiples of revenue method.

> **Fast Fact**
>
>  You can calculate the times-revenue method forward or backward. You can divide the purchase price by annual revenue to arrive at the multiple, or you can multiple annual revenues by a desired times-revenue target to arrive at a potential target price.

## Applying the Times-Revenue Method: A Case Study

 In fiscal year 2021, X (formerly Twitter) reported $5.077 billion in revenue, growing by over $1.3 billion from 2020. In 2022, Elon Musk announced his intention to acquire the company for $44 billion. This decision was later reversed and solidified via [Securities and Exchange Commission](https://www.investopedia.com/terms/s/sec.asp) filings.

The acquisition occurred at a company valuation of approximately 8.7 times-revenue. This means that at an acquisition price of $44 billion, Musk paid 8.7 times the annual revenue of X ($5.1 billion).

The company's net annual loss for the same period demonstrates a glaring weakness of the times-revenue model. In 2021, it incurred an annual loss of $221 million, its second consecutive year of negative profit. Although the times-revenue valuation method indicates a value of 8.7, the method fails to consider that the company was not a profitable company at the time.

As a postscript, X recorded $4.4 billion in revenue in 2022, an 11% decline. Its estimated loss was $152 million, likely reflecting Musk's cost-cutting after his takeover and some costs from the $13 billion in loans he took out to finance the purchase.

In April 2023, it ceased to exist as a separate corporate entity and was merged int X Corp., a wholly-owned subsidiary of X Holdings Corp., which is owned by Musk.

## How Do You Calculate Times-Revenue?

Times-revenue is calculated by dividing the selling price of a company by the prior 12 months revenue of the company. The result indicates how many times of annual income a buyer was willing to pay for a company.

## What Is a Good Times-Revenue Multiple?

Every company, industry, and sector will have different guidelines on what constitutes a good times-revenue valuation. Companies in higher growth industries will often sell for higher multiples due to the greater potential of future revenue. Alternatively, companies of different sizes may be valued differently due to the inherent risk of a newer business compared to an established company.

## How Is the Times-Revenue Method Used?

Times-revenue is used to set a benchmark purchase price of a company. Using only the revenue of the business, a buyer can estimate a fair selling price by imputing what times-revenue they are willing to pay. Alternatively, a seller may have a purchase price in mind but must check times-revenue for reasonableness.

## Is a Low Times Multiple Bad?

A low times multiple isn't necessarily bad. It simply means the company is being valued lower than other companies. If a seller is motivated to sell, having a low times multiple may be a good thing as it may be seen by buyers as a cheaper, potentially bargain price compared to companies with much higher multiples.

## The Bottom Line

The times-revenue method offers a simple framework for valuing a company by multiplying revenue over a set period by an industry-specific factor. However, this method has significant limitations. It does not account for a company's expenses or profitability, meaning revenue isn't necessarily indicative of actual value.

Additionally, like all valuation methods, it relies on historical data and cannot predict future performance. For a more comprehensive valuation, it's crucial to consider earnings and other financial metrics alongside revenue.

> **Article Sources**
>
> 1.  Tiran Rothman. "[Valuations of Early-Stage Companies and Disruptive Technologies](https://www.google.com/books/edition/_/n70LEAAAQBAJ?hl=en&gbpv=0)," Page 14. Springer International Publishing, 2020.
>     
> 2.  U.S. Securities and Exchange Commission. "[Twitter, Inc., Form 10-K, For the Year Ended December 31, 2021](https://www.sec.gov/Archives/edgar/data/1418091/000141809122000029/twtr-20211231.htm)." Page 62.
>     
> 3.  The New York Times. "[Elon Musk Completes $44 Billion Deal to Own Twitter](https://www.nytimes.com/2022/10/27/technology/elon-musk-twitter-deal-complete.html)."
>     
> 4.  U.S. Securities and Exchange Commission. "[Twitter, Inc., Amendment No. 9 to Schedule 13D, (Filed July 8, 2022)](https://d18rn0p25nwr6d.cloudfront.net/CIK-0001418091/26b24ef2-929f-496f-852c-645969e8269d.pdf)."
>     
> 5.  Social Media Today. "[Challenges Continue at Twitter, with Revenue Down 40% Year-Over-Year](https://www.socialmediatoday.com/news/challenges-continue-at-twitter-with-revenue-down-40-year-over-year/640648/#:~:text=That%20brings%20Twitter's%20outgoings%20to,operating%20loss%20of%20%24152m.)."
>     
> 6.  United States District Court Northern District of California. "[Case No. 3:22-cv-2646-LB: Defendant Twitter, Inc.'s Corporate Disclosure Statement and Certification of Interested Entities or Persons](https://storage.courtlistener.com/recap/gov.uscourts.cand.395023/gov.uscourts.cand.395023.123.0.pdf)."