Comparable Company Analysis
The mechanics of relative valuation, peer group selection, and when to use EV/EBITDA versus P/E multiples.
Relative Valuation
While a DCF model attempts to determine the intrinsic value of a company based on future cash flows, Comparable Company Analysis (Comps) is a relative valuation method. It assumes that similar companies in the same industry should trade at similar multiples.
Selecting the Peer Group
The most critical step in comps analysis is selecting the right peer group. If the peers are wrong, the valuation is garbage. Criteria for selection include:
- Industry Classification: Operating in the same sub-sector.
- Financial Profile: Similar size (revenue, EBITDA), margins, and growth rates.
- Geography: Operating in similar regulatory and macroeconomic environments.
Key Trading Multiples
Enterprise Value / EBITDA
The most common valuation multiple. It represents the value of the core operating business relative to the cash flow it generates before capital structure, taxes, and non-cash items (D&A) distort the picture.
Use case: Capital-intensive businesses, standard industrial companies.
Enterprise Value / Revenue
Used primarily for high-growth companies that are not yet profitable (like early-stage SaaS). Because there is no positive EBITDA to divide by, analysts default to top-line revenue.
Use case: High-growth tech, unprofitable companies.
Price / Earnings (P/E)
An equity value multiple. It divides the share price by Earnings Per Share (EPS). Because Net Income is after interest and taxes, this metric is heavily distorted by a company's capital structure (how much debt they use).
Use case: Financial institutions (where interest is a core operating item) and quick retail comparisons.
NTM vs LTM
Markets are forward-looking. Therefore, valuing a company based on what it did last year (Last Twelve Months - LTM) is less useful than valuing it on what it is expected to do next year (Next Twelve Months - NTM).
When looking at trading comps, always prioritize NTM (or NFM - Next Fiscal Year) multiples based on consensus analyst estimates.
The Output Range
Comps never give a single number. They provide a range. If the peer group trades at an average of 10.0x NTM EV/EBITDA, and the target company is slightly faster growing but has lower margins, an analyst might apply a 9.5x to 11.0x multiple range to the target's projected EBITDA to determine implied Enterprise Value.