Comparable Company Analysis

🔍 Comparable Company Analysis (Trading Comps)

Definition: A relative valuation methodology that values a company by comparing its financial metrics (revenue, EBITDA, earnings) to those of publicly-traded peer companies, using implied market multiples.

Also called: “Comps,” “Trading multiples,” “Public comps” Part of the standard IB valuation toolkit alongside DCF Valuation and Precedent Transactions.

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🔑 The Core Logic

Principle: Similar companies in the same industry should trade at similar multiples.

If Company A trades at 10× EBITDA and Company B is identical, then Company B is also worth ~10× EBITDA.

Key assumption: Capital markets are roughly efficient at pricing comparable companies.

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📐 Step-by-Step Process

Step 1: Select Comparable Companies

The most important (and most debated) step.

Ideal comps are similar on:

• Industry / subsector
• Business model (recurring revenue, transaction-based, etc.)
• Revenue scale (within 3–5× ideally)
• Geography
• Growth rate
• Margin profile
• Capital intensity

Reality: Perfect comps rarely exist. Use judgment; note differences in analysis.

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Step 2: Spread Key Financial Data

For each comp, collect LTM (Last Twelve Months) and forecast data:

Metric	Trailing (LTM)	Forward (NTM)
Revenue	✓	✓ (consensus)
Gross Profit	✓
EBITDA	✓	✓
EBIT	✓
Net Income	✓	✓
EPS	✓	✓

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Step 3: Calculate Market Multiples

Enterprise Value (EV) multiples (capital structure-neutral):

$EV=\text{Market Cap}+\text{Net Debt}+\text{Minority Interest}-\text{Associates}$

$\text{Net Debt}=\text{Total Debt}-\text{Cash \& Equivalents}$

Multiple	Formula	Used For
EV/Revenue	EV ÷ Revenue	Early-stage, high-growth companies
EV/EBITDA	EV ÷ EBITDA	Most common; eliminates D&A differences
EV/EBIT	EV ÷ EBIT	Capital-intensive businesses
EV/FCF	EV ÷ Free Cash Flow	Cash-generative mature businesses

Equity Value multiples (levered):

Multiple	Formula	Used For
P/E	Price ÷ EPS	Banks, insurers, general companies
P/B	Price ÷ Book Value	Banks, asset-heavy companies

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Step 4: Calculate Implied Valuation Range

Once you have the comp set multiples (e.g., EV/EBITDA range of 9.0× – 13.0×):

Apply to your target company: $\text{Implied EV}=\text{Target EBITDA}\times \text{Multiple Range}$

$\text{Implied Equity Value}=\text{Implied EV}-\text{Net Debt}$

$\text{Implied Share Price}=\frac{\text{Implied Equity Value}}{\text{Shares Outstanding}}$

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📊 Example: Software Company Comps

Company	Revenue	EBITDA	EV	EV/Revenue	EV/EBITDA
Salesforce	$30B	$5.4B	$190B	6.3×	35.2×
Workday	$7.2B	$1.1B	$52B	7.2×	47.3×
ServiceNow	$8.9B	$1.7B	$130B	14.6×	76.5×
HubSpot	$2.2B	$0.26B	$20B	9.1×	76.9×
Median				7.8×	62.0×

Target company: $500Mrevenue,$75M EBITDA

• Implied EV at median revenue multiple: $500M\times 7.8\times =\ast \ast$3.9B**
• Implied EV at median EBITDA multiple: $75M\times 62.0\times =\ast \ast$4.65B**

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⚠️ Comps Limitations

Limitation	Why It Matters
No two companies are identical	Adjustments are subjective
Market may misprice the sector	Comps capture sentiment, not value
LTM ≠ future performance	Forward comps require estimates
Control premium not included	Public comps undervalue acquisition targets
Wide range with few comps	Small samples = noisy output

Control premium: In acquisitions, buyers pay 20–40% above trading comps — because buyers need to justify paying for control. Use Precedent Transactions for M&A pricing.

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🔗 Connected Concepts

• DCF Valuation — Intrinsic value; paired with comps for the “football field”
• LBO Model — PE buyer’s constraint on how much they can pay
• Investment Banking Overview — Comps are a core IB deliverable
• Capital Markets — Public market data is the source for comps
• WACC — DCF complement to comps-based valuation

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← 📊 Finance MOC | Related: DCF Valuation · LBO Model · Investment Banking Overview