EV/Revenue-Growth: PEG for the Enterprise Value Era

Key Takeaways

• EV to revenue growth divides the EV revenue multiple by expected percentage revenue growth.
• A rule of thumb sets the fair EV revenue ratio near one third of the percentage growth rate.
• The most common mistake is treating a low growth-adjusted ratio as cheap when margins are negative.
• The metric is best used as a screen among software peers, not as a standalone valuation anchor.

What It Is

EV to revenue growth, sometimes called the ERG ratio, the growth adjusted EV to revenue, or the enterprise value PEG, divides the EV to revenue multiple by the revenue growth rate. The ratio is conceptually identical to PEG, which divides price to earnings by earnings growth, but it uses enterprise value and top line growth.

The formula was popularized in software and SaaS valuation because many early stage software firms have no earnings to anchor a PEG on. Revenue and revenue growth are the natural anchors.

The Intuition

Two firms with the same EV to revenue multiple are not equivalent if one is growing twice as fast as the other. The growth adjusted version corrects for this. It explicitly rewards faster growth in the denominator so faster growers do not look uniformly expensive on raw EV to revenue.

The intuition has limits. Value does not increase linearly with growth, so dividing by growth introduces bias. Damodaran has long argued that PEG style growth normalization implicitly assumes the stated growth lasts forever, which is rarely true. EV to revenue growth carries the same caveat.

How It Works

The formula is simple.

EV / Revenue-Growth = (EV / Revenue) / Growth Rate (%)

If a firm trades at 6.0 times revenue with 30 percent revenue growth, EV to revenue growth equals 6.0 divided by 30, or 0.20. A widely cited rule of thumb in software is that EV to revenue should sit at roughly one third of the percentage growth rate, which corresponds to an EV to revenue growth of about 0.33.

Industry surveys covering SaaS firms have placed the median EV to revenue near 6.2x, median revenue growth near 21 percent, and median EV to revenue growth, also called ERG, near 0.31. Numbers materially above 0.33 are typically considered expensive on a growth adjusted basis, while values well below 0.33 signal cheapness or unusual concerns.

Worked Example

Consider two hypothetical software firms. Firm A trades at 10x revenue with 40 percent growth. Firm B trades at 5x revenue with 15 percent growth.

Firm A. EV to revenue growth equals 10 divided by 40, or 0.25. Firm B. EV to revenue growth equals 5 divided by 15, or 0.33.

Raw EV to revenue makes Firm A look twice as expensive. The growth adjusted version reverses the ranking. Each unit of growth is cheaper at Firm A.

Whether this ranking holds depends on durability. If Firm A's 40 percent growth is one cycle long and reverts to 10 percent next year, the apparent cheapness disappears. If Firm B's 15 percent is durable for 10 years, it may earn its 5x multiple. Always check growth durability and margin profile before trusting the ratio.

Common Mistakes

1. Ignoring profitability. A negative margin firm with 50 percent growth and a 7x EV to revenue may show a friendly 0.14 EV to revenue growth, but losses can wipe out value before the growth pays off. Pair with the Rule of 40.
2. Using the wrong growth horizon. Backward growth and forward growth can differ sharply. Use a consistent NTM growth rate for the denominator and apply that choice across the comparison set.
3. Comparing across industries. A 0.30 EV to revenue growth in software is normal. The same 0.30 in a low margin distributor is not directly comparable because the unit economics differ.
4. Forgetting durability. A firm growing 70 percent in the first year of its hyper growth phase will not grow 70 percent forever. Mean reversion in growth makes raw growth-adjusted multiples optimistic in early years.
5. Using PEG-style framework on negative growth. Negative growth produces a meaningless or negative denominator. Reframe the analysis around margin and stability rather than growth adjusted multiples.

Frequently Asked Questions

What is EV to revenue growth in simple terms? It is the EV to revenue multiple divided by the revenue growth rate. The lower the result, the more growth you get for each unit of EV to revenue.

How does EV to revenue growth affect investment decisions? The ratio reframes which growth stories are priced fairly. In the worked example, Firm A initially looked expensive but came out cheaper on a per unit of growth basis, prompting a deeper look at durability.

What is a real-world example of EV to revenue growth? SaaS sector surveys have placed the median software EV to revenue growth, sometimes labeled ERG, near 0.31 in 2024 to 2025, with elite firms operating below 0.20 and struggling firms above 0.50.

How can investors use EV to revenue growth effectively? Pair the ratio with the Rule of 40, net revenue retention, and free cash flow margin. A low EV to revenue growth is only attractive if the underlying economics support persistent growth at acceptable margins.

How is EV to revenue growth different from PEG? PEG divides price to earnings by earnings growth. EV to revenue growth divides EV to revenue by revenue growth. EV to revenue growth is more useful when earnings are negative or volatile, common in early stage software.

Sources

1. CFA Institute. Market-Based Valuation: Price and Enterprise Value Multiples. https://www.cfainstitute.org/insights/professional-learning/refresher-readings/2026/market-based-valuation-price-enterprise-value-multiples
2. Kellblog. Demystifying the Growth-Adjusted EV/Revenue Multiple. https://kellblog.com/2024/01/10/demystifying-the-growth-adjusted-enterprise-value-to-revenue-multiple-and-introducing-the-erg-ratio/
3. Damodaran, A. Controlling for differences in relative valuation. NYU Stern. https://pages.stern.nyu.edu/~adamodar/New_Home_Page/littlebook/controldifferences.htm
4. McKinsey & Company. The right role for multiples in valuation. https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/the-right-role-for-multiples-in-valuation

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.