What is Comparable Company Analysis?
The comparable company analysis involves evaluation of comparable companies in the same industry. These companies are evaluated based on common metrics and ratios and the information is then applied to the company being valued to derive the said company’s value. As this method derives a company’s value from comparable companies, it is a relative form of valuation (unlike methods like the Discounted Cash Flow (DCF) method, which is an intrinsic form of valuation that closely examines the company’s financial data)
The steps in performing a comparable company analysis include:
Step 1: Finding the right companies to analyse
Look up the company to be valued on a financial database like Bloomberg, Capital IQ, Factset or Elkon to get a detailed description and industry insight of the business. Search those databases for companies that operate in the same industry with comparable characteristics, and the more similar the comparable companies are to the company to be valued, the more accurate the valuation will be.
Step 2: Running a preliminary screening based on certain criterion. Common basis for comparison between companies include
- Industry classification
- Location
- Size & Scale, in terms of revenue, assets, and employees
- Rate of growth
- Profit margins and overall profitability
Step 3: Gathering Company-Specific Financial Information
Using one of the previously mentioned financial databases, search for information on the companies that have been identified to be like the company to be valued. This information can also be found from the company’s annual report of it is a publicly listed company.
When gathering information, it is common practice to start from the financial statements, where information Gross Profit, Revenue and EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) can be found. It is also important to note that for mature business, metrics like EBITDA and EPS (Earnings per share) may be more applicable, while Gross Profit and Revenue might be more relevant to younger companies that are still growing.
Step 4: Setting up a table for comparison
After acquiring all the relevant information for the companies to be compared, an intuitive way to compare them would be to set up a table in excel that lists out all the relevant information about the companies that are going to analysed. This usually includes, but is not limited to:
- Share Price
- Market Capitalization
- Net Debt
- Enterprise Value
- Revenue
- EBITDA
- EPS
Step 5: Calculating the Comparable Ratios
With the financial information pertaining to the various companies in the comparison table, start deriving the various ratios to be compared. The most common ratios are:
- EV/Revenue
- EV/Gross Profit
- EV/EBITDA
- P/E
- P/B
- P/NAV
From this comparison, a conclusion can be drawn about the how the company should be valued.
Written by: Ethan Liew (by Assembly Works)
