Introduction to Comparable Company Analysis, or Comps
The Comparable Company Analysis, or "Comps," is one of the most elementary valuation techniques that are applied in finance, primarily in investment banking, equity research, and corporate finance. A relative valuation method, it compares the value of a company based on the valuations of peer companies, or comparable companies, that exist in the market. It will mainly refer to the analysis of the company being studied in contrast to its peer group, and using key financial metrics and ratios such as P/E, EV/EBITDA, among others.
The article would be covering the process in detail as far as comparable company analysis is concerned, it would look at the concept of valuation multiples, would elaborate on the process for selection of appropriate comparables, and would then understand differences between enterprise value and equity value multiples.
Step 1: State the purpose of the valuation
First of all, outline the purpose for which you intend to conduct a Comparable Company Analysis valuation. Are you assessing a privately held company or simply looking for a rough feel for market value on a public company? Are you seeking this analysis as part of your preacquisition planning or are looking at an investment opportunity? It will guide you as to how your analysis should be prepared and which set of comparables and multiples to rely upon.
Step 2: Select the Peer Group
Peer group selection is the most critical component of any Comps analysis. Essentially, this peer group is a benchmark to be compared against. Ideally, these companies should have similar characteristics with the target company in terms of:
Industry/sector: This will be a comparison to the firms operating within the same industry. If your target firm is within the technology sector, then you would compare them to companies that produce software, hardware companies, or semiconductors firms.
Size: The size of the company may sometimes influence the valuation