What is the relationship between EV/EBITDA and EV/Sales if both ratios double?

To understand the relationship between EV/EBITDA and EV/Sales when both ratios double, it's important to recognize what these ratios indicate about a company's financial performance.

EV/EBITDA is used to evaluate a company's valuation relative to its operating earnings. Conversely, EV/Sales compares a company's enterprise value to its revenue. The EBITDA margin, calculated as EBITDA divided by sales, provides insight into how efficiently a company generates profit from its sales.

When both the EV/EBITDA and EV/Sales ratios double, the implication is that the valuation metrics are increasing relative to both EBITDA and sales. However, if these ratios double simultaneously, it doesn't necessarily suggest that the overall profit margin has remained stable.

To illustrate this, if we say that both ratios were initially at a certain level, an increase in EV/EBITDA indicates that either EBITDA has decreased relative to enterprise value or that enterprise value has increased significantly while EBITDA has not increased at a comparable rate. If we look at the ratio of EBITDA to sales (the EBITDA margin), the increased valuation metrics could imply that sales are not keeping pace with the increase in the value measures, leading to a potential decrease in the EBITDA margin.

Therefore, since EBITDA is a function of sales and the ratios