Valuation Metric

1. Definition

• A valuation metric is a financial ratio or measure used to assess the value of a company relative to its fundamentals (earnings, revenue, cash flow, etc.).
• Different metrics are used depending on the company’s stage (startup vs. mature), industry (tech vs. manufacturing), and profitability (profit vs. loss-making).

In short: They tell investors if a company is expensive or cheap compared to peers.

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2. Common Valuation Metrics

For Public Companies

• P/E Ratio (Price-to-Earnings)
  • $\frac{\text{Share Price}}{\text{Earnings per Share (EPS)}}$​ → How much investors pay for $1 of earnings.
• P/S Ratio (Price-to-Sales)
  • $\frac{\text{Market Cap}}{\text{Revenue}}$​ → Useful for early-stage or loss-making companies (no profit yet).
• P/B Ratio (Price-to-Book)
  • $\frac{\text{Market Cap}}{\text{Book Value of Equity}}$​ → Compares market value vs net assets.
• EV/EBITDA (Enterprise Value / EBITDA)
  • $\frac{\text{Enterprise Value}}{\text{Earnings Before Interest, Taxes, Depreciation, Amortization}}$​ → Popular in private equity & M&A, adjusts for debt/cash.

For Startups & High-Growth Companies

• Revenue Multiples (EV/Revenue)
  → Often used in SaaS and D2C where profitability comes later.
• Rule of 40 (for SaaS)
  • $\text{Revenue Growth \%} + \text{EBITDA Margin \%} \geq 40$ → Healthy SaaS valuation benchmark.
• LTV:CAC Ratio
  → Measures efficiency of customer acquisition; investors want ≥3.
• Burn Multiple
  • $\frac{\text{Net Burn (cash used)}}{\text{Net New ARR (Annual Recurring Revenue)}}$​ → Startup efficiency metric (esp. in venture capital).

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3. Example

Suppose a SaaS company:

• Revenue = \$50M
• EBITDA = \$10M
• Market Cap = \$300M
• Enterprise Value (EV) = \$350M
• EV/Revenue = 350 ÷ 50 = 7×
• EV/EBITDA = 350 ÷ 10 = 35×

Investors might compare these multiples to other SaaS peers to see if the company is overvalued or undervalued.

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4. Why It’s Important

• Provides a standardized way to compare companies across industries.
• Helps in M&A negotiations, VC funding, IPO pricing.
• Reflects investor expectations of growth vs profitability.

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Summary:
A valuation metric is a financial ratio (like P/E, EV/EBITDA, or LTV:CAC for startups) that helps estimate how much a company is worth. Different metrics fit different company stages:

• Mature = P/E, EV/EBITDA
• Growth/Startups = EV/Revenue, Rule of 40, LTV:CAC