Advanced Finance

Comparable Company Analysis

Trading comps look like the easiest valuation method and are the easiest to get wrong. Learn the consistency rules that separate a defensible multiple from a plausible-looking number.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: What a business is worth on the basis the public market is pricing similar businesses today, and how much of that number survives contact with the adjustments.

What this topic is

Comparable company analysis values a business by applying valuation multiples observed in the public trading prices of similar companies. You build a peer set, compute each peer's enterprise value and earnings measure on a consistent basis, form the multiples, choose a statistic, and apply it to the target.

Why it matters

It is the fastest read on what the market will actually pay, and it is the number that anchors every negotiation, fairness opinion and board discussion. It is also where most valuation errors originate, because almost every mistake is a quiet inconsistency between what the numerator covers and what the denominator earns, an error that never announces itself and can move a value by a fifth.

Who should learn it

Analysts building the page, principals reading it, and anyone who has to say in a board meeting why the comps say one thing and the discounted cash flow says another.

What you will understand

  • The numerator-denominator consistency rule, and every place it is violated
  • How to build an enterprise value bridge that survives scrutiny
  • Why lease accounting, stock compensation and non-controlling interests break comparability
  • What basis of value a trading comp actually produces, and what has to be added to reach a control price

Prerequisites

Common misconception

"The peer set is the hard part; the arithmetic is trivial." The peer set is a judgement call that reasonable people argue about and then move on. The arithmetic is where the money is lost. Applying a forward multiple to trailing earnings, using basic rather than diluted shares, mixing IFRS and US GAAP lease treatment, or forgetting non-controlling interests each produce errors in the 5 to 20% range, and they compound. A carefully chosen peer set computed inconsistently is worse than a rough peer set computed correctly.