What is a Comparable Company Analysis?

Comparable company analysis is the process of valuing a company based upon the value of other companies that have similar characteristics. The comparable metrics are generally known as comps. To be comparable companies, the companies must generally be in the same industry and similar in size and operational capacity or production. The comparable metrics of a company are compared to the companys valuation. For example, Enterprise Value can be related to the Free Cash Flow (FCF) or Earnings Before Interest Taxes, Depreciation, and Amortization (EBITDA) of the company. This ratio will be used to assign a value (Enterprise Value) to a comparable company based upon its FCF or EBITDA. A similar method is valuing a company based upon the valuation given to a comparable company in a similar transaction.

How Does a Comparable Company Analysis Work?

Using comparables or comps is the simplest manner for determining a company's value. Perhaps the most difficult aspect is identifying comparable companies. As discussed, comparable companies are generally in the same industry, have similar operations, size, and located in similar regions. The most common valuation measures used in comparable company analysis are enterprise value to sales(EV/S),price to earnings(P/E),price to book(P/B), and price to sales(P/S). Because of the differences between comparable companies, this method can be imprecise. As such, comparable analysis is a good way of approximating value. Analysts generally use various methods, such as asset-based and cash-flow-based methods (known as intrinsic methods), to arrive at a final valuation. It is very common to use intrinsic methods to determine company value. This is the starting point for determining the appropriate value to metric (Value / Metric) ratio. Once you develop a ratio, you can use it to value comparable companies. Also, you can use this ratio from other companies to value your company. Another method of determining a company's value is through transactional comparables. Transactional comps work the same way as described above. The enterprise value, however, is estimated based upon the amount paid for company ownership in a transaction (merger, acquisition, or stock sale). This method is popular when valuing a company that is going through a similar transaction to a comparable company. Analysts often seek to identify companies that are undervalued by using a combination of valuation methods, including comparables.