Comparable Company Analysis

The idea is that similar businesses should be valued in similar ways. If comparable companies are valued at around ten times their EBITDA, a company with similar characteristics might be worth roughly ten times its own EBITDA.

The process involves choosing a group of comparable companies, often called a peer group, based on factors such as industry, size, growth, profitability and geography. Their market values are then compared with financial measures to calculate multiples. Finally, those multiples are applied to the target company's figures.

For example, if a group of similar software companies trades at an average of 8 times EV/Revenue and the target company has revenue of 50 million, its enterprise value might be estimated at about 400 million.

The method is quick and grounded in actual market prices. Its weaknesses are that truly comparable companies can be hard to find, and if the whole market is overvalued or undervalued, the result will be too. Analysts therefore usually use it alongside other methods, such as discounted cash flow analysis.

Note: Trading comparables, often called trading comps, is another name for comparable company analysis. The word "trading" refers to the fact that the peer companies' shares trade publicly.