Comparable Companies and Precedent Transactions

Comparable company analysis, often called "comps", values a company by looking at how the market values similar businesses. If peers trade at 12 times EBITDA, a similar company might be worth around 12 times its own EBITDA. Comps are fast, grounded in real market prices and widely used by bankers, analysts and investors. Their weakness is that they tell you whether something is cheap relative to its peers, not whether the whole group is mispriced.

The steps#

1. Choose a peer group of similar companies.
2. Collect financial data: price, shares, debt, cash, revenue, EBITDA, EPS, forecasts.
3. Calculate multiples for each peer: EV/EBITDA, EV/Sales, P/E and others.
4. Find the range: median, average, high and low.
5. Apply the multiples to the target's metrics.
6. Adjust for differences in growth, margins, risk and quality.

Choosing peers#

Good comparables share:

No peer is identical. Finding 5 to 15 reasonable comparables is typical.

A simple comps table#

Trading comps vs transaction comps#

Transaction multiples are usually higher because buyers pay a premium for control and synergies.

Adjusting for differences#

• Growth: use PEG style comparisons or regress multiples against growth. See PEG Ratio.
• Margins: higher margin companies deserve higher EV/Sales.
• Accounting: adjust for one off items, leases and different fiscal years.
• Calendarise: align fiscal years to the same calendar period.

Limits#

• Relative, not absolute: if the whole sector is overvalued, comps will overvalue the target too. Before the dot com crash, many internet companies looked "reasonable" compared with each other. See The Dot-Com Bubble.
• Few true peers for unique businesses.
• Market mood affects all peers at once.
• Data quality for forecasts.

Combine comps with intrinsic methods such as DCF to cross check. See DCF Valuation.

Comps in trading#

Traders use comps to spot relative value inside a sector. If one company trades at a large discount to peers with similar growth and margins, the market may be pricing in a problem, or it may be overlooking the stock. Checking news, guidance and analyst revisions usually explains the gap. A discount that persists without a clear reason can be an opportunity; a discount with a clear reason is often a value trap. See Guidance and Earnings Revisions.

Frequently asked questions#

What is comparable company analysis?#

A valuation method that estimates a company's value by applying the multiples of similar publicly traded companies to its own financial metrics.

How do you choose comparable companies?#

Pick companies with similar industries, business models, size, growth, margins and geography.

What is the main weakness of comps?#

They show relative value only; if the whole peer group is mispriced, the comparison will be too.

Next, learn to value companies with several businesses in Sum of the Parts Valuation.