Comparable Company Analysis

What is Comparable Company Analysis?

• Definition: A method used for relative valuations to find a firm’s fair value by identifying comparable companies, selecting valuation tools, and preparing a table for valuation inferences.
• It is part of the equity valuation series.
• Understanding relative valuation multiples like EV/EBITDA, PE Ratio, Price to Book value, PEG Ratio is crucial.

Key Takeaways

• Helps determine a company's fair value.
• Involves identifying similar companies and suitable valuation methods.
• Peer group analysis assists investors and financial advisors in decision-making using financial metrics and multiples.

Explanation

• Also known as peer group analysis, widely used in investment analysis and corporate finance.
• Compares companies in similar industries or sectors using valuation multiples and financial metrics.
• Helps infer if a company's price is overvalued or undervalued.

Examples of Comparable Company Analysis

Example #1: Real Estate

• Compares attributes like number of rooms, size, etc., to determine similar costs.

Example #2: Box Inc IPO

• Focus on company information, size, valuation multiples, operating metrics, and summary.
• Valuation determined using scenarios like optimistic, base, and pessimistic.

How to Conduct Comparable Company Analysis

1. Identify the Industry
   • Determine industries for relevant company classifications.
2. Understand Company Descriptions
   • Gather detailed business descriptions from websites, filings, etc.
3. Identify Key Competitors
   • Use research reports, company filings, and financial news to find competitors.

Excel Template for Comparable Company Analysis

• Use of excel templates to calculate the required valuation multiples.
• Key formulas include calculations for equity value, diluted equity value, enterprise value, etc.

Steps for Calculation

1. Input basic company information.
2. Input latest balance sheet information.
3. Calculate stock options and convertible securities.
4. Calculate LTM numbers.
5. Determine equity and enterprise value.
6. Calculate valuation multiples.

Pros and Cons

Pros

• Market-based, widely accepted, reflects market sentiments, quick analysis.

Cons

• Difficulty in selecting comparable companies, differences in financial reporting, incomplete information, market inefficiencies.

Comparable Company Analysis Vs. Precedent Transaction Analysis

• Different approaches and purposes in valuation.
• Use of market data vs. past transaction data.

FAQs

• Why use it?: Utilizes ratios for easy comparison.
• Difference from DCF?: DCF predicts future cash flows; comparable analysis uses peer groups.
• Assumptions: Companies of similar size and industry valued similarly.
• Applicability: Suitable for publicly traded companies and can be adapted for private ones.