Comparable company analysis (often "comps" or "trading comparables") is a relative valuation method that estimates a company's value by comparing it to similar publicly traded companies. The premise is that similar businesses should trade at similar multiples of earnings, cash flow or revenue.
Steps
- Select a peer group — public companies similar in industry, business model, size, growth and margins.
- Gather financial data — market figures and operating metrics such as revenue, EBITDA, EBIT and net income (often on a forward, next-twelve-months basis).
- Calculate multiples for each peer, for example EV/EBITDA, EV/Revenue, EV/EBIT and P/E.
- Benchmark the peer multiples (typically the median and the inter-quartile range) and apply them to the target's metrics.
- Triangulate the resulting valuation range.
Common multiples
| Multiple | Numerator | Best for |
|---|---|---|
| EV/EBITDA | Enterprise value | Most companies; capital-structure-neutral |
| EV/Revenue | Enterprise value | High-growth or loss-making firms |
| EV/EBIT | Enterprise value | When depreciation differs across peers |
| P/E | Equity (price) | Mature, profitable companies |
EV-based multiples pair an enterprise-value numerator with a pre-financing metric (EBITDA, EBIT, revenue); equity-based multiples such as P/E pair price with a post-financing metric (net income). Mixing the two is a classic error.
Strengths and weaknesses
Strengths: market-based and current; relatively quick; easy to communicate; based on real prices.
Weaknesses: truly comparable public companies can be hard to find; multiples reflect prevailing market sentiment, so an over- or under-valued sector skews the result; it captures market (minority) value and therefore excludes the control premium a buyer pays. For that reason trading comps usually sit below precedent transactions on the football field.
See also
- Business valuation — The set of methods used to estimate the economic value of a company or its equity.
- Precedent transaction analysis — Relative valuation using the multiples paid in comparable past acquisitions.
- Enterprise value — The total value of a company’s operations, independent of its capital structure.
- Discounted cash flow — An intrinsic valuation that discounts a company’s projected cash flows to present value.
External resources
Practitioner guides from Main Street Wealth, an M&A advisory firm:
- Understanding Business Valuation Methods — How buyers value small and mid-sized companies, with worked examples.