Deep Dive: How to Value Companies with Negative Earnings — Beyond P/E Ratios

The P/E ratio divides a company's stock price by its earnings per share. When EPS is negative, the result is a negative number that defies intuitive interpretation. Is a P/E of -5 better or worse than -40? The answer is neither — the metric simply doesn't apply.

This limitation affects several categories of companies. Pre-revenue startups that have recently gone public, high-growth companies reinvesting all profits into expansion, cyclical businesses in a downturn, and companies undergoing major restructuring all routinely report negative earnings. In the current market, Rivian trades at a P/E of -4.93 with EPS of -$3.07, while Snowflake shows a P/E of -40.06 with EPS of -$4.02. These numbers tell you the companies are unprofitable, but nothing about their relative value or investment potential.

The key insight is that negative earnings don't automatically mean a bad investment. Many of the best-performing stocks of the last decade — Amazon, Tesla, Shopify — operated at losses during their highest-growth phases. The question isn't whether a company is profitable today, but whether it's building toward sustainable profitability while creating genuine economic value. That's what alternative valuation metrics help you assess.

When earnings are negative, revenue becomes the starting point for valuation. The enterprise-value-to-revenue (EV/Revenue) ratio compares a company's total value — including debt and subtracting cash — against its top-line sales. Unlike P/E, this metric works for every company that generates revenue, regardless of profitability.

Consider two loss-making companies in today's market. Rivian's EV/Revenue stood at 21.3x in Q4 2025, reflecting its $1.29 billion quarterly revenue against a $27.4 billion enterprise value. Snowflake traded at 76.7x EV/Revenue on $1.21 billion in Q3 FY2026 revenue. The dramatic difference — Snowflake at nearly 4x Rivian's multiple — reflects the market's assessment of growth quality, gross margins, and the path to profitability.

Why does Snowflake command such a higher revenue multiple? Gross margin is a major factor. Snowflake posted a 67.8% gross margin in its most recent quarter, meaning it keeps $0.68 of every revenue dollar after direct costs. Rivian's gross margin was just 9.3% in Q4 2025, and it was actually negative (-15.8%) as recently as Q2 2025. Higher gross margins mean more revenue eventually converts to profit, justifying a higher price per dollar of sales. When using EV/Revenue, always compare companies within the same sector and with similar margin profiles.

Here's a critical concept that separates sophisticated investors from beginners: a company can report negative earnings while generating positive cash flow. Snowflake is the textbook example. In fiscal year 2025 (ending January 2025), Snowflake reported a net loss of $1.29 billion. But its free cash flow was positive $913 million. How is that possible?

The answer is stock-based compensation (SBC). Snowflake paid $1.48 billion in stock-based compensation that year — an expense that reduces reported earnings but doesn't consume any cash. When you add back SBC and other non-cash charges, operating cash flow was $960 million, and after subtracting $46 million in capital expenditures, free cash flow was solidly positive. This pattern has accelerated: Snowflake's FCF grew from $81 million in FY2022 to $497 million in FY2023, $779 million in FY2024, and $913 million in FY2025.

Contrast this with Rivian, where the cash flow story is less encouraging. Rivian's free cash flow was -$2.49 billion in FY2025, with operating cash flow of -$779 million and capital expenditures of $1.71 billion for factory expansion. The trajectory is improving — FCF was -$6.42 billion in FY2022 — but Rivian is genuinely burning cash, not just reporting accounting losses. This distinction matters enormously. A company with negative earnings but positive free cash flow (like Snowflake) is in a fundamentally different position than one with negative earnings and negative free cash flow (like Rivian).

For companies burning cash, the most urgent valuation question isn't what the business is worth in an ideal future — it's whether the company survives long enough to get there. This is where the cash runway analysis comes in.

Rivian ended FY2025 with $3.58 billion in cash, down from $5.29 billion a year earlier and $7.86 billion two years before that. With free cash flow of -$2.49 billion in FY2025, a simple calculation suggests roughly 1.4 years of runway at the current burn rate. However, the burn rate has been improving: from -$6.42 billion (FY2022) to -$5.89 billion (FY2023) to -$2.86 billion (FY2024) to -$2.49 billion (FY2025). If that trajectory continues, the picture looks less dire.

Investors should examine three factors when evaluating cash-burning companies. First, the cash position and recent trend — is the runway extending or shrinking? Second, the gross margin trajectory — Rivian achieved a positive 9.3% gross margin in Q4 2025 after years of negative margins, suggesting the unit economics are finally turning. Third, the debt structure — Rivian carries $6.7 billion in debt against $4.6 billion in tangible book value, with a debt-to-equity ratio of 1.46. Companies that need to raise capital through dilutive equity offerings or expensive debt create additional risk for existing shareholders.

When you encounter a company with negative earnings, work through these valuation approaches in order. Start with EV/Revenue to get a baseline relative valuation against peers. A software company at 10x revenue with 70% gross margins is very different from a hardware manufacturer at 10x revenue with 10% margins.

Next, examine free cash flow. If FCF is positive despite negative GAAP earnings, the business may be more valuable than it appears — the losses are likely driven by non-cash charges like stock-based compensation, depreciation, or amortization of acquired intangibles. If FCF is also negative, assess the burn rate trajectory and cash runway.

Then look at the gross margin trend. A company with improving gross margins is demonstrating operating leverage — each additional dollar of revenue drops more to the bottom line. Rivian's shift from -15.8% gross margin in Q2 2025 to +9.3% in Q4 2025 is a meaningful inflection that changes the valuation story even though overall earnings remain deeply negative.

Finally, consider what profitability would look like at scale. Snowflake's operating expenses are dominated by R&D (41% of revenue) and stock-based compensation (34% of revenue). As revenue scales, these expenses typically grow more slowly, creating a path to profitability. Analysts model this using scenario analysis: if Snowflake grows revenue to $5 billion while R&D stabilizes at 25% and SBC drops to 15%, operating margins could reach 25-30%. That future profitability, discounted back to today, is what drives the current valuation.

The hardest lesson for investors is that some of the market's biggest winners spent years with negative earnings. The difference between a value trap and a future winner often comes down to revenue growth quality, margin improvement trajectory, and management's capital allocation discipline — none of which show up in a P/E ratio.