Why might you drop sales-based multiples in your analysis?

Dropping sales-based multiples in your analysis often stems from the consideration that profitability metrics provide a clearer and more accurate picture of a company's value. Sales multiples, while useful in some cases, do not account for the underlying costs associated with generating those sales. As a result, they may be misleading, especially in industries where margins vary significantly.

Profitability metrics, on the other hand, such as EBITDA or net income, factor in both revenue generation and the associated costs, providing a more holistic view of how efficiently a company is operating and how much profit it ultimately retains from its sales. When valuing a company, especially for investment or acquisition purposes, understanding the relationship between sales and profitability is critical. Using profitability metrics allows analysts and investors to gauge how well a company converts sales into actual earnings, thus making them a more reliable basis for valuation compared to sales-only metrics.