EV/ARR
Valuation
Industry:
SaaS
Short Definition
EV/ARR measures a company’s Enterprise Value (EV) relative to its Annual Recurring Revenue (ARR). It shows how much investors are paying for every dollar of predictable, subscription‑based revenue. This multiple is especially relevant for SaaS, subscription, or usage‑based businesses, where recurring revenue forms the foundation of future growth. It’s the standard valuation yardstick for venture, growth‑stage, and public SaaS companies.
Short Definition
EV/ARR measures a company’s Enterprise Value (EV) relative to its Annual Recurring Revenue (ARR). It shows how much investors are paying for every dollar of predictable, subscription‑based revenue. This multiple is especially relevant for SaaS, subscription, or usage‑based businesses, where recurring revenue forms the foundation of future growth. It’s the standard valuation yardstick for venture, growth‑stage, and public SaaS companies.
Short Definition
EV/ARR measures a company’s Enterprise Value (EV) relative to its Annual Recurring Revenue (ARR). It shows how much investors are paying for every dollar of predictable, subscription‑based revenue. This multiple is especially relevant for SaaS, subscription, or usage‑based businesses, where recurring revenue forms the foundation of future growth. It’s the standard valuation yardstick for venture, growth‑stage, and public SaaS companies.
Why it matters for Investors
Predictable value proxy: ARR strips out one‑time sales, providing a clean measure of underlying recurring traction.
Growth signal: High EV/ARR often reflects strong retention, expansion, and scalability expectations.
Early profitability alternative: When EBIT or EBITDA are negative, EV/ARR offers a consistent valuation benchmark.
Capital efficiency check: Tracks how effectively a company converts ARR into overall enterprise value — a signal of quality versus hype.
Why it matters for Investors
Predictable value proxy: ARR strips out one‑time sales, providing a clean measure of underlying recurring traction.
Growth signal: High EV/ARR often reflects strong retention, expansion, and scalability expectations.
Early profitability alternative: When EBIT or EBITDA are negative, EV/ARR offers a consistent valuation benchmark.
Capital efficiency check: Tracks how effectively a company converts ARR into overall enterprise value — a signal of quality versus hype.
Why it matters for Investors
Predictable value proxy: ARR strips out one‑time sales, providing a clean measure of underlying recurring traction.
Growth signal: High EV/ARR often reflects strong retention, expansion, and scalability expectations.
Early profitability alternative: When EBIT or EBITDA are negative, EV/ARR offers a consistent valuation benchmark.
Capital efficiency check: Tracks how effectively a company converts ARR into overall enterprise value — a signal of quality versus hype.
Formula
Where:
Enterprise Value (EV) = Market Capitalization + Total Debt – Cash & Cash Equivalents
Practical considerations:
Count only true subscriptions: When calculating ARR, include only the portions of revenue that repeat every month or year — like subscriptions, maintenance, or renewal fees. Leave out one-time setup fees or project-based work that won’t repeat.
Use a consistent timeline: Decide whether you’re valuing the business based on today’s recurring revenue level (current ARR) or what’s expected over the next 12 months (forward ARR). Just be clear which one you’re using.
Keep numbers comparable: Make sure both ARR and Enterprise Value use the same currency and time period (e.g., both in USD and as of the same month or quarter). This makes your EV/ARR ratio consistent and easy to compare with peers or benchmarks.
Retention quality: The same ARR with high churn justifies lower multiples — quality matters as much as size.
Formula
Where:
Enterprise Value (EV) = Market Capitalization + Total Debt – Cash & Cash Equivalents
Practical considerations:
Count only true subscriptions: When calculating ARR, include only the portions of revenue that repeat every month or year — like subscriptions, maintenance, or renewal fees. Leave out one-time setup fees or project-based work that won’t repeat.
Use a consistent timeline: Decide whether you’re valuing the business based on today’s recurring revenue level (current ARR) or what’s expected over the next 12 months (forward ARR). Just be clear which one you’re using.
Keep numbers comparable: Make sure both ARR and Enterprise Value use the same currency and time period (e.g., both in USD and as of the same month or quarter). This makes your EV/ARR ratio consistent and easy to compare with peers or benchmarks.
Retention quality: The same ARR with high churn justifies lower multiples — quality matters as much as size.
Formula
Where:
Enterprise Value (EV) = Market Capitalization + Total Debt – Cash & Cash Equivalents
Practical considerations:
Count only true subscriptions: When calculating ARR, include only the portions of revenue that repeat every month or year — like subscriptions, maintenance, or renewal fees. Leave out one-time setup fees or project-based work that won’t repeat.
Use a consistent timeline: Decide whether you’re valuing the business based on today’s recurring revenue level (current ARR) or what’s expected over the next 12 months (forward ARR). Just be clear which one you’re using.
Keep numbers comparable: Make sure both ARR and Enterprise Value use the same currency and time period (e.g., both in USD and as of the same month or quarter). This makes your EV/ARR ratio consistent and easy to compare with peers or benchmarks.
Retention quality: The same ARR with high churn justifies lower multiples — quality matters as much as size.
Worked Example
Line Item | Value | Notes |
|---|---|---|
Market Capitalization | $600M | Current equity value (post-money or public market cap) |
Total Debt | $100M | Outstanding loans and financial obligations |
Cash & Cash Equivalents | $50M | Company cash balance |
Enterprise Value (EV) | $650M | = $600M + $100 − $50M |
Monthly Recurring Revenue (MRR) | $5.0M | Average MRR based on active subscriptions |
Annual Recurring Revenue (ARR) | $60.0M | $5.0M × 12 (as ARR = MRR × 12) |
EV/ARR Multiple | 10.8× | $650M ÷ $60M = 10.8× |
Notes:
A 10.8× EV/ARR means investors are valuing the company at 10.8 times its current recurring annual revenue.
In plain terms: every dollar of predictable, subscription revenue is worth $10.80 in enterprise value.
If the company doubles its ARR next year (say from $60M to $100M) — and its valuation stays the same — the multiple would fall from 10.8× to 6.5×. That shows how growth “makes the valuation cheaper” over time.
Investors and founders use this multiple to quickly compare how the market values similar subscription‑based businesses (for example, other SaaS firms or platform startups). A higher multiple often signals stronger growth or retention.
For fundraising or M&A, this ratio helps align your company’s valuation expectations with those of comparable public or private peers.
Market Capitalization: Reflects the company’s equity value as determined by stock price and shares outstanding, a core ingredient to EV.
Total Debt and Cash: Debt is added to include all capital providers, while cash and equivalents are subtracted as they offset net debt—crucial for understanding firm value beyond equity.
Enterprise Value (EV): Represents the full economic value of the business, encompassing both equity and debt holders, net of cash holdings, making it a more complete valuation measure than market cap alone.
Worked Example
Line Item | Value | Notes |
|---|---|---|
Market Capitalization | $600M | Current equity value (post-money or public market cap) |
Total Debt | $100M | Outstanding loans and financial obligations |
Cash & Cash Equivalents | $50M | Company cash balance |
Enterprise Value (EV) | $650M | = $600M + $100 − $50M |
Monthly Recurring Revenue (MRR) | $5.0M | Average MRR based on active subscriptions |
Annual Recurring Revenue (ARR) | $60.0M | $5.0M × 12 (as ARR = MRR × 12) |
EV/ARR Multiple | 10.8× | $650M ÷ $60M = 10.8× |
Notes:
A 10.8× EV/ARR means investors are valuing the company at 10.8 times its current recurring annual revenue.
In plain terms: every dollar of predictable, subscription revenue is worth $10.80 in enterprise value.
If the company doubles its ARR next year (say from $60M to $100M) — and its valuation stays the same — the multiple would fall from 10.8× to 6.5×. That shows how growth “makes the valuation cheaper” over time.
Investors and founders use this multiple to quickly compare how the market values similar subscription‑based businesses (for example, other SaaS firms or platform startups). A higher multiple often signals stronger growth or retention.
For fundraising or M&A, this ratio helps align your company’s valuation expectations with those of comparable public or private peers.
Market Capitalization: Reflects the company’s equity value as determined by stock price and shares outstanding, a core ingredient to EV.
Total Debt and Cash: Debt is added to include all capital providers, while cash and equivalents are subtracted as they offset net debt—crucial for understanding firm value beyond equity.
Enterprise Value (EV): Represents the full economic value of the business, encompassing both equity and debt holders, net of cash holdings, making it a more complete valuation measure than market cap alone.
Worked Example
Line Item | Value | Notes |
|---|---|---|
Market Capitalization | $600M | Current equity value (post-money or public market cap) |
Total Debt | $100M | Outstanding loans and financial obligations |
Cash & Cash Equivalents | $50M | Company cash balance |
Enterprise Value (EV) | $650M | = $600M + $100 − $50M |
Monthly Recurring Revenue (MRR) | $5.0M | Average MRR based on active subscriptions |
Annual Recurring Revenue (ARR) | $60.0M | $5.0M × 12 (as ARR = MRR × 12) |
EV/ARR Multiple | 10.8× | $650M ÷ $60M = 10.8× |
Notes:
A 10.8× EV/ARR means investors are valuing the company at 10.8 times its current recurring annual revenue.
In plain terms: every dollar of predictable, subscription revenue is worth $10.80 in enterprise value.
If the company doubles its ARR next year (say from $60M to $100M) — and its valuation stays the same — the multiple would fall from 10.8× to 6.5×. That shows how growth “makes the valuation cheaper” over time.
Investors and founders use this multiple to quickly compare how the market values similar subscription‑based businesses (for example, other SaaS firms or platform startups). A higher multiple often signals stronger growth or retention.
For fundraising or M&A, this ratio helps align your company’s valuation expectations with those of comparable public or private peers.
Market Capitalization: Reflects the company’s equity value as determined by stock price and shares outstanding, a core ingredient to EV.
Total Debt and Cash: Debt is added to include all capital providers, while cash and equivalents are subtracted as they offset net debt—crucial for understanding firm value beyond equity.
Enterprise Value (EV): Represents the full economic value of the business, encompassing both equity and debt holders, net of cash holdings, making it a more complete valuation measure than market cap alone.
Best Practices
Sector benchmarking: Always compare within industry verticals — EV/Revenue norms differ widely.
Use both trailing and forward multiples: Investors typically look at EV/Revenue (LTM) and EV/Revenue (Next 12 months).
Combine with margin metrics: Pair with Gross Margin % or Operating Margin to assess quality of revenue.
Cohort tracking: Follow how the company’s multiple evolves over time relative to growth rate.
Scenario planning: Model how changes in revenue projection or valuation affect EV/Revenue for board/investor updates.
Best Practices
Sector benchmarking: Always compare within industry verticals — EV/Revenue norms differ widely.
Use both trailing and forward multiples: Investors typically look at EV/Revenue (LTM) and EV/Revenue (Next 12 months).
Combine with margin metrics: Pair with Gross Margin % or Operating Margin to assess quality of revenue.
Cohort tracking: Follow how the company’s multiple evolves over time relative to growth rate.
Scenario planning: Model how changes in revenue projection or valuation affect EV/Revenue for board/investor updates.
Best Practices
Sector benchmarking: Always compare within industry verticals — EV/Revenue norms differ widely.
Use both trailing and forward multiples: Investors typically look at EV/Revenue (LTM) and EV/Revenue (Next 12 months).
Combine with margin metrics: Pair with Gross Margin % or Operating Margin to assess quality of revenue.
Cohort tracking: Follow how the company’s multiple evolves over time relative to growth rate.
Scenario planning: Model how changes in revenue projection or valuation affect EV/Revenue for board/investor updates.
FAQs
How is EV/ARR different from EV/Revenue?
EV/ARR uses only recurring revenue, providing a purer signal of repeatable income, while EV/Revenue includes non‑recurring sales and services.What qualifies as recurring revenue?
Contractually committed, predictable revenue streams — such as subscriptions, maintenance fees, or consumption‑based usage renewals.Should I use current or forward ARR?
Investors use both: Current EV/ARR for present performance, Forward EV/ARR for expected traction in the next 12 months.Does ARR quality matter?
Absolutely. High churn, heavy discounting, or low expansion dilute multiple justification. Strong Net Retention (NRR ≥110%) sustains premium valuation
FAQs
How is EV/ARR different from EV/Revenue?
EV/ARR uses only recurring revenue, providing a purer signal of repeatable income, while EV/Revenue includes non‑recurring sales and services.What qualifies as recurring revenue?
Contractually committed, predictable revenue streams — such as subscriptions, maintenance fees, or consumption‑based usage renewals.Should I use current or forward ARR?
Investors use both: Current EV/ARR for present performance, Forward EV/ARR for expected traction in the next 12 months.Does ARR quality matter?
Absolutely. High churn, heavy discounting, or low expansion dilute multiple justification. Strong Net Retention (NRR ≥110%) sustains premium valuation
FAQs
How is EV/ARR different from EV/Revenue?
EV/ARR uses only recurring revenue, providing a purer signal of repeatable income, while EV/Revenue includes non‑recurring sales and services.What qualifies as recurring revenue?
Contractually committed, predictable revenue streams — such as subscriptions, maintenance fees, or consumption‑based usage renewals.Should I use current or forward ARR?
Investors use both: Current EV/ARR for present performance, Forward EV/ARR for expected traction in the next 12 months.Does ARR quality matter?
Absolutely. High churn, heavy discounting, or low expansion dilute multiple justification. Strong Net Retention (NRR ≥110%) sustains premium valuation
Related Metrics
Commonly mistaken for:
EV/Revenue (includes all revenues, not just recurring)
P/S Ratio (uses equity value, not enterprise value)
Related Metrics
Commonly mistaken for:
EV/Revenue (includes all revenues, not just recurring)
P/S Ratio (uses equity value, not enterprise value)
Related Metrics
Commonly mistaken for:
EV/Revenue (includes all revenues, not just recurring)
P/S Ratio (uses equity value, not enterprise value)
Components:
Index