Comparable Company Analysis

In this article, we will go in-depth and understand the comparable company analysis, its use, advantages, disadvantages, its common use cases, and how to interpret it.

It is important for businesses to value their companies. The value of the company is an important factor in various significant decisions that the owners and management take. The comparable company analysis is a method that can be used to determine the company by using the metrics of similar businesses. This is used to see how the public market values the company. For example an investment banker will get comparables that consist of many groups to be used to determine the metrics and valuation multiples of their target investment.

What Is a Comparable Company analysis?

There are many types of methods to value a company. Investors and businesses choose the best one that is suitable for them, specific to information on their company or investment. By studying various businesses similar to the company you need to value, you can determine the net value of it.

The Comparable Company Analysis is based on the assumption that companies that are similar in size, industry, and stature will be valued the same way. But, the main thing to keep in mind here is that this method will give the investor an estimate close to the value, in other cases the valuation can be significantly different from the real value. Let us take an example to understand this better. If the share price of a company is currently $100, is it the real value of the share? Is the share truly worth $100 or $200 or $40? Or maybe the share is worth something else.

If the share’s worth is less than the current price of $100, the company might be overvalued and you should avoid investing in it. But in case each share is worth more than $100, the business might have been undervalued and you should invest in it. This valuation methodology helps you to derive an estimate of the company’s impaired value or the intrinsic value. It also shows you the difference between the current market value and the estimated value.

Why use Comparable company analysis?

Out of all the methods out there, investors choose the comparable company analysis method because it is easy to use, as the data required for estimating the value is widely available. This is only so for the companies that are publicly traded, as all the information is publicly available. Also this method assumes that the market is pricing the securities of other businesses efficiently. Companies give you a good range for the valuation while other methods of valuation are dependent on a long list of assumptions, such as the discounted cash flow.

All these factors contribute to make the composition the best and most commonly used. The comparable company analysis is used by people such as research analysts, investors (private equity), investment bankers, and other types of analysts.

Where is Comparable company analysis most commonly used?

Comparable company analysis is commonly used in many cases such as when the company cannot be valued with another method, if it is to be used in the terminal value assumption or to use the data to compare businesses. The reason for this is that it is an easy method as all the data is available on public companies, additionally, the estimated value can be close to the real value.

Advantages and Disadvantages of Comparable Company Analysis

The Comparable Company Analysis has many benefits that investors benefit from such as:

  • Easy communication
  • Benchmarks for the possible valuation multiples
  • Easy calculation
  • Data is available widely

But this process also has disadvantages, some of them are:

  • It is easily influenced by non-fundamental factors
  • Data not easily available for private companies
  • It can be difficult for you to find the correct data for your company to compare due to many reasons
  • This method is not useful for business that has a few or no comparable companies

Comparable Company Analysis Method

Once you understand what is comparable company analysis, the next step is to understand how to do it. Here we will go through steps to create the table. This will be essential as this will provide you with the data for comparing your company in order to estimate the value. This process is commonly performed by analysts, investment bankers, corporate developers, equity researchers, or even investors in private equity. Here are the comparable company analysis steps:

Company   EV/Rev   EV/EBITDA  
ADOBE INC.8.1011.7813.9313.6217.8530.1738.3242.9244.1852.22
AVID TECHNOLOGY INC.0.640.890.881.302.333.7427.2117.9415.9722.94
CORELOGIC INC.2.442.993.083.534.8311.1713.2912.7715.3415.61
INTERNATIONAL BUSINESS MACHINE CORP 2.412.251.702.252.1814.2313.5510.2616.4823.67
Average 3.404.484.905.176.8014.8223.0920.9722.9928.61
Median 2.432.622.392.893.5812.7020.3815.3516.2223.31
25th Percentile 1.971.911.502.012.299.3113.4912.1415.8121.11
75th Percentile 3.865.195.796.058.0818.2129.9924.1823.4030.81

#1 Analyze the target company

The first step of this process is to analyze the target company. This is one of the hardest steps of this process as it is mainly subjective. An analyst will gather all the information on the related company from certain websites, this will help you to get an industry classification and a detailed description of the company. Here you must gather the right information about the company, this will help you in the later stages to choose comparable companies that have the same features as your company.

Then the next thing to do is to search for businesses that are in the same industry and that have characteristics similar to yours. The more similar the company, the better it will be for your valuation. The analyst who is doing this process will run a criterion and will go through a screening. The screening process will include:

  • Geography
  • Growth rate
  • Size
  • Profitability
  • Industry classifications
  • Margins

comparable company analysis

#2 Set comparable criteria

Once you have found the companies that are similar and relevant to your target company, you need to then gather all the information on their financials. The information of these companies can be derived online from various websites. The required information will depend on the stage of the business in the lifecycle and the industry. If the companies that you are comparing are mature, then the information you will require is the EPS and the EBITDA. In the case of companies that are not mature, you will have to look at the revenue or their gross profit.

If you are not able to access some of this information from other websites, then you can easily go to the company website and download their quarterly and annual reports. These reports have all the information that you will need for the comparison. The only downside to this is that it is more time-consuming as you will have to go through the entire report to find the relevant data.

#3 Find and select the right comparable companies – create a peer group

Once you have gathered the relevant data on the companies that are similar to your target company, you will have to select the right ones out of the list that is the most similar. Once you have selected similar companies, create a peer group with all the data of these companies.

#4 Collect necessary financial data

Once you have found all the right comparable companies you will have to create a table and input all the information that you have gathered. This will help you analyze them. The required data that will be in the table for comparing are:

  • Company name
  • EPS
  • Revenue
  • Net Debt
  • Analyst estimates
  • Share price
  • Value of the Enterprise
  Market Data Financial Data   Valuation   
Company Name Price/sh Market Cap TEV Sales EBITDA EBIT Earnings EV/Sales EV/EBITDA EV/EBIT P/E
Chivita 76.28336,082370,24493,70826,20822,25414,762----
Pepsi 162.74247,766287,648132,83024,68819,75611,236----
Coco-Cola 104.6220,65225,52811,9942,6382,2061,240----
Red Bull 1399.2423,23622,0044,4921,2121,168714----
Power Horse 41.621,9281,9361,29015613282----
This information needs to be organized in a manner that should be easy to read.

#5 Calculate multiples of comparable company

With all the required information in one place, the analyst now needs to start to calculate the relevant ratios. These ratios will be used to estimate the targeted company’s value. The ratios that the analyst will need to calculate are:

  • P/E (price-earnings ratio)
  • P/B (price-book ratio)
  • P/NAV (price-net asset value ratio)
  • EV/ Gross Profit (enterprise value-gross profit ratio)
  • EV/Revenue (enterprise value-revenue ratio)
  • EV/EBITDA (enterprise value-earnings before interest, tax, depreciation, amortization)

#6 Applying multiples to the target company

The analyst here will need to apply the multiples to the target company’s key financial data in order to calculate the value. The recommended way to apply the range of multiples are:

  • Target company’s historical financial data as CFO, Equity of the last fiscal year, EBITDA, and Sales.
  • The projected data of the company targeted that will usually prepare the business for the analyst.

#7 Determine the valuation

Generally, an analyst will take the comparable company’s median or the average of the multiples and apply them to the EBITDA, gross profit, net income, revenue, or the metrics included in the table.

For the analyst to come up with a meaningful average, they will remove the outliers and massage the numbers till they look realistic or relevant. Let us take an example, If the group of comparable companies has an average P/E ratio of 13 times, to get an equity value the analyst will multiply the company earnings they are trying to value by 13 times.

How to interpret company analysis table

After you have completed the table and finalized the numbers, you will have to interpret the results. There are many ways to use this information. One way this data can be viewed is by looking at the under and overvalued businesses. Since the data does not consist of the qualitative factors of the business, the results have to be studied carefully in order to uncover the available opportunities.

In order for you to evaluate the numbers accurately in the business, you need to first understand what they stand for. Let us take an example here: We need to understand why XYZ Ltd. traded at a discounted EV/EBITDA multiple to ABC Ltd.

Is this so because the company is undervalued and is a good opportunity to buy? Or maybe it has a low growth rate with high capital expenditure. XYZ Ltd might trade at a lower multiple when compared, but it can be more expensive. This is where the analyst will have to look at all the details in depth and analyze them. Let us take another example:

 Comparable company
XYZ ltd.
Comparable company
ABC Ltd.
company Zero Ltd.
Zebra Ltd 
Market PPS$24$32$128$46.24
Outstanding Sh20,00032,000320012000
Mkt value of equity$120,000$256,000$102,400-
Mkt value of Debt$80,000$120,000$40,000-

Let us use this example in order to understand and read the table. The main aim here is to understand what price point we should invest in. It is clear from the above table that:

  • The companies are trading on an average of 1.1x
  • We note that XYZ MVIC/Sales is at 1.3x which is higher than the rest
  • The lowest MVIC/Sales multiple is 0.8
  • From the financial model, we take note that the EBITDA is positive and we can use the MVIC/EBITDA as a valuation tool.
  • Also, the MVIC/EBIT and MVIC/Sales can be used as valuation tools.
  • Since there is one high and one low multiple in MVIC/Sales ratio, it is best to have various companies to compare.
  • We take the average case from the three to derive the value, in this case $138,724.

Applications of comparable company analysis

There are many applications of comparable company analysis. Generally, this method is performed by associates or financial analysts for many uses, some of them are:

  • Restructuring
  • M&A Advisory
  • Share Buybacks
  • Fairness Opinions
  • IPOs
  • Terminal Value in Discounted Cash Flow Model
  • Follow on offerings

Get Your Company Valuation from Eqvista

Calculating the value of a high traded business can be easily done by using the comparable company analysis, even though there are pros and cons of the comparable company analysis method. The startup valuation method can give you a good estimate of the value of your startup in the market. It is one way of deriving the value of the company as close as possible. But this is not to be done on your own as you can significantly undervalue or overvalue your company.

Finding the right Professional advisor that will fit your needs will be the best thing to do. Eqvista is a platform that is backed by professionals that can help you derive the value of your company accurately. You will have access to tools that will assist you in many ways like 409a valuations and cap table management.

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