Comparable company analysis (comps) explained simply

If you want to know what a house is worth, you look at similar houses nearby. Comparable company analysis does the same for businesses. This page explains how comps work, the steps involved and where they can go wrong.

Quick answer

Comparable company analysis, or 'comps', is a valuation method that estimates a company's value by comparing it with similar listed companies. Analysts calculate valuation multiples such as P/E, EV/EBITDA or EV/Revenue for a peer group and apply a typical multiple to the target company's numbers. It is quick and based on current market prices, but it depends on finding truly similar peers.

Key takeaways

• Comps value a company using peers' valuation multiples.
• Common multiples are P/E, EV/EBITDA and EV/Revenue.
• Choosing the right peer group is the most important step.
• It reflects current market mood, high or low.
• It works best alongside other methods like DCF.

What is comparable company analysis?

It is a relative valuation method. Instead of forecasting cash flows far into the future, it asks: how does the market value similar businesses today? If similar companies trade at 20 times earnings, a company with similar features might be valued at around that level too.

The method is widely used by analysts, investment bankers and investors because it is quick and grounded in actual market prices.

The main steps

For example, if peers have a median EV/EBITDA of 12 times and the target's EBITDA is Rs 150 crore, the estimated enterprise value is Rs 1,800 crore. Subtracting net debt gives the equity value.

Which multiples are used?

The P/E ratio compares share price with earnings and is the most widely known. EV/EBITDA compares enterprise value with operating profit before depreciation, and is useful when companies have different levels of debt. EV/Revenue is used for companies with low or no profits.

Sector-specific multiples are also common, such as price to book value for banks. The right multiple depends on what drives value in that industry.

Common pitfalls

No two companies are exactly alike. Differences in growth, margins, risk, size and accounting can make a peer's multiple a poor guide. A careful analyst adjusts for these differences instead of applying an average blindly.

Comps also reflect the market's current mood. If the whole sector is overvalued, comparable company analysis will suggest a high value too. That is why analysts often check comps against a DCF.

The key point to remember

Comps tell you how a business might be valued compared with its peers right now. They are quick and practical, but only as reliable as the peer group and the judgement behind it.

Frequently Asked Questions