could your elaborate on the following paragraph? i'm not sure how something is worth 20 dollars because of 1 dollar yearly revenue. what assumptions are you making?
Let's assume the 1-year government bond yield is at 5% (it's not, but it simplifies the math, so bear with me). As a gross oversimplification, that means that a $20 investment today will produce a risk-free return of 5% ($1) at the end of a year. The converse is also true: if a risk-free investment produces $1 in revenues over the course of a year, then the investment should be valued at $20.
That calculation assumes that the risk-free rate is 5%, and that you will get $1 per year forever (i.e., considering the company to be an annuity that pays $1 per year forever). A more general formula is:
Value = (Annual revenue) / (interest rate - growth rate)
The interest rate here is the interest rate that takes into account how risky your business is--the rate you'd be able to borrow at, the "cost of capital". Let's say you could get a loan (secured only by the assets of the business) at 15% interest, and that you expect to grow by 5% per year. Then per $1 of annual revenue:
Let's assume the 1-year government bond yield is at 5% (it's not, but it simplifies the math, so bear with me). As a gross oversimplification, that means that a $20 investment today will produce a risk-free return of 5% ($1) at the end of a year. The converse is also true: if a risk-free investment produces $1 in revenues over the course of a year, then the investment should be valued at $20.