When to Use PSR vs EV/EBITDA, and Why

TL;DR

• PSR (Price-to-Sales Ratio) is useful for sales-based valuation and fits early or growth companies with volatile earnings.
• EV/EBITDA reflects operating cash generation, making it suitable for comparisons that exclude debt and tax effects.

What PSR Is and When to Use It

PSR divides market capitalization (or enterprise value) by revenue. It is simple to calculate and allows comparison of companies with volatile profits or losses, making it useful for early-stage growth firms, consumer sectors, or companies whose earnings are distorted by one-off costs. However, PSR does not capture how revenue converts into profit, so profitability differences must be considered.

Example (hypothetical numbers):

• Company A market cap 1,000억원, annual revenue 500억원 → PSR = 1,000 / 500 = 2.0
• Company B market cap 800억원, annual revenue 400억원 → PSR = 2.0

The same PSR can imply different valuations depending on margins and profitability structure.

What EV/EBITDA Is and When to Use It

EV/EBITDA is enterprise value (EV) divided by adjusted operating profit (EBITDA). Enterprise value adds net debt (debt - cash) to market capitalization. This metric excludes depreciation, interest, and taxes, so it is useful for comparing operating cash generation. It is commonly used when companies have different capital structures or when industries are capital intensive.

Example (hypothetical numbers):

• Company C: market cap 1,200억원, cash 100억원, debt 300억원 → net debt = 200억원. EV = 1,200 + 200 = 1,400억원

annual EBITDA = 140억원 → EV/EBITDA = 1,400 / 140 = 10.0

• Company D: market cap 900억원, cash 50억원, debt 250억원 → net debt = 200억원. EV = 1,100억원

annual EBITDA = 110억원 → EV/EBITDA = 10.0

Even with the same EV/EBITDA, growth rates, capital intensity, and industry sensitivity can differ.

Common Misconceptions and Cautions

• Treating a low PSR as automatically undervalued or a high PSR as automatically overvalued is risky. Check margin structure and cost efficiency relative to revenue.
• Do not assume EV/EBITDA reflects all costs. Because it excludes depreciation, interest, and taxes, you should separately assess capital expenditure burdens and differences in cost of capital.
• Both metrics are industry-dependent. The same number means different things for a software firm versus a manufacturer.
• Verify the latest figures and regulatory details with broker reports, public disclosures, or tax authorities.

Practical Tips Summary

• Prefer PSR when comparing growing companies with unstable earnings or losses.
• Prefer EV/EBITDA when capital structure differs and you need to compare operating cash generation.
• Always review revenue growth, margins, and capital expenditure (or depreciation) together.

This article is for informational purposes and not investment advice.