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Businesses and investors use a handful of valuation methods when determining the worth of a company. Comparable company analysis is one such process, which can help ascertain the value of a particular business, by studying other businesses like it within the same industry.

This particular analysis model works on the assumption that companies of similar size and stature will be valued similarly. However, it is essential to understand that such an analysis will only provide investors with an approximate value, which can be drastically different from the company’s real valuation.

How to Conduct a Comparable Company Analysis?

Comparable company valuation is a highly beneficial process, which can be used to compare a business’s valuation multiples with its peers. However, analysts need to follow a distinct process when undertaking such a comparative study of two or more brands. Listed below are some of the steps necessary to initiate the analysis process –

  • Choosing the Right Companies to Compare

The company to be valued needs to be pitted against a similar company. To do this, analysts must have in-depth knowledge of the first business, including its industry classification and much more. To locate another company of similar stature, one must look for these common factors –

  • The industry they belong to.
  • The area where both companies function.
  • The rate of growth in both companies.
  • Revenue generated.
  • Number of employees.
  • Assets
  • Profitability and margins.

When analysts locate two companies, which are similar in all of these characteristics, they can proceed with comparable company analysis of these two businesses.

  • Acquiring financial information from both companies

Collecting financial information about a business can be challenging and time-consuming. Nonetheless, one can derive such data from studying a business’s quarterly and yearly reports. Still, not every company will list such information publicly. In such cases, an analyst would need to work with whatever little data is available. Depending on the sector and the types of businesses being compared, this step is often the trickiest.

  • Creating a comparable company analysis table

The next step involves using Excel to create a table for the comparison of two or more brands. Consider the following as a comparable company analysis example.

Company Price per share Market 
Cap (Cr.)
TEV (Cr.) Sales (Cr.) EBITDA

(Cr.)

EBIT (Cr.) Revenue (Cr.) EV/Sales
KPY Steels Rs.139 Rs.324 Rs.365 Rs.242 Rs.17 Rs.16.32 Rs.15.45 1.5x
Unique Steels Co. Rs.121 Rs.217 Rs.234 Rs.213 Rs.13 Rs.11.24 Rs.10.33 1.09x

Keep in mind that besides the EV/Sales comparison, such a process can pit two companies against one another in regards to other factors, like –

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  • EV/Revenue
  • EV/EBITDA
  • EV/Gross profit
  • Price/Net Asset Value

These comparisons each reveal different aspects of the two or more companies in question.

  • Creating the perfect table format

To ensure effective comparable company analysis, this table needs to be properly formatted. Analysts can club together various separate data, such as financial information, market data and valuation data. Doing so will lead to clarity when assessing the positioning of the two enterprises.

  • Interpreting the data presented in this table

The last step in this comparable analysis approach is to study the data presented inside the table and interpret the same in a meaningful manner. Interpretation can assist in pinpointing whether a particular business is undervalued or overvalued. Still, due to the lack of qualitative factors, such analysis must be performed with immense care.

Differences between Comparable and Intrinsic Valuations

Comparable company analysis is one of the two types of relative valuation of businesses. The other approach is known as the precedent transaction analysis. In both of these methods, two similar companies, with factors like resources and size in common, are compared against one another.

However, in the case of intrinsic valuation, only the primary company is considered. The projected cash flow for this business is analysed and ultimately used to arrive at its estimated valuation.

The best approach for investors is to employ a mix of intrinsic and comparable company valuation techniques. Apart from deriving the valuation, using both methods should also allow analysts to figure out whether a particular business is under or overvalued.

Where is Comparable Company Analysis Most Commonly Used?

Investors can utilise this valuation approach in several cases. Most commonly, one can notice its application in the following instances –

  • Follow-on offerings
  • Fairness opinions
  • Initial Public Offerings or IPO
  • Share buybacks
  • M&A Advisory
  • Discounted cash flow model’s Terminal Value determination
  • Restructuring

Advantages of Using the Comps Process

Listed below are some of the benefits that investors can experience when conducting Comps.

  • Wide availability of data ensures easier calculation.
  • Benchmark determination of possible valuation-related multiples.
  • Simplifies communication across different participants.

This process, however, has its share of flaws. For one, comparable company analysis is influenced easily by non-fundamental factors. Moreover, this process is not as dependable when comparing two thinly-traded businesses.

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