Comparable Company Analysis Comprehensive Tips

comparable company analysisWhat Is Comparable Company Analysis?

Comparable company analysis (CCA) is a process used to evaluate the value of a company by using the metrics of other businesses of similar size in the same industry. Comparable company analysis operates under the assumption that similar companies will have similar valuations multiples such as EV/EBITDA. These similar companies or peers will be chosen based on a number of criteria. Some of the criteria for selecting comparable companies include:
Business profile:

  • Sector
  • Products and services
  • Customers and end markets
  • Distribution channels
  • Geography

Financial profile

  • Size
  • Profitability
  • Growth profile
  • Return on investment
  • Credit

Calculations Used in Comparable Company Analysis

There are many different formulas and calculations used in comparable companies analysis. The following are some of the most popular:

Equity multiples

  • P/E or PER (Variant | CPE = P/CEPS)
  • M/B or P/B or (Variant P/ABV = P/Adjusted BV) – Calculate as Diluted Market Capitalization/Book value. Where Book Value = Share Capital + Reserves.
  • PEG or PE/EG (Price to Earnings/Earnings Growth) Calculated as PE/Expected Earnings Growth (3-year CAGR). As a substitute historical earnings growth can be used.

Enterprise multiples

  • EV/Sales – The metric is used for companies that have yet to break even or have faced an unexpected loss in operational earnings.
  • EV/EBITDA – The most commonly used multiple by bankers, the metric captures operational efficiency of the firm
  • EV/EBIT – An alternative to EV/EBITDA

Tips and Hints for Doing Comparable Company Analysis

  • Investors can use any multiple as long as the numerator relates to the denominator
  • In some cases, the denominator can be a non-financial metric. This is useful when trying to find a basis of comparison between companies at different stages of growth or when financial metrics are unavailable
  • Watch for revenue growth. Revenues of healthy companies generally grow over time. When you see negative revenue growth, you should investigate the reason

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Comparable Company Analysis Comprehensive Tips
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