7/16/22, 6:09 PM Comparable Company Analysis - Free Guide, Template and Examples

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Comparable Company Analysis

How to make a "comps table"

Written by CFI Team

Updated February 18, 2022

What is Comparable Company Analysis?

Comparable company analysis (or “comps” for short) is a valuation
methodology that looks at ratios of similar public companies and uses
them to derive the value of another business. Comps is a relative form of
valuation, unlike a discounted cash flow (DCF) analysis, which is an
intrinsic form of valuation.

In this guide, we will break down all the steps necessary to perform
comparable company analysis, as required in most financial analyst jobs.

Steps in Performing Comparable Company Analysis

In the next section of this guide, we will go through a detailed list of how
to build your own comps table.  This type of work will be routine for
anyone working as an analyst in investment banking, equity research,
corporate development, or private equity.
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1. Find the right comparable companies

This is the first and probably the hardest (or most subjective) step in
performing a ratio analysis of public companies.  The very first thing an
analyst should do is look up the company you are trying to value on
CapIQ or Bloomberg so you can get a detailed description and industry
classification of the business.

The next step is to search either of those databases for companies that
operate in the same industry and that have similar characteristics.   The
closer the match, the better.

The analyst will run a screen based on criteria that include:

1. Industry classification

2. Geography

3. Size (revenue, assets, employees)

4. Growth rate

5. Margins and profitability

To learn more about this process, see CFI’s Business Valuation Course.

2. Gather financial information

Once you’ve found the list of companies that you feel are most relevant
to the company you’re trying to value it’s time to gather their financial
information.

Once again, you will probably be working with Bloomberg Terminal or

Capital IQ and you can easily use either of them to import financial
information directly into Excel.

The information you need will vary widely by industry and the company’s
stage in the business lifecycle.  For mature businesses, you will look at
metrics like EBITDA and EPS, but for earlier stage companies you may
look at Gross Profit or Revenue.

If you don’t have access to an expensive tool like Bloomberg or Capital IQ

you can manually gather this information from annual and quarterly
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reports, but it will be much more time-consuming.

Learn more: list of Bloomberg functions.

3. Set up the comps table

In Excel, you now need to create a table that lists all the relevant
information about the companies you’re going to analyze.

The main information in comparable company analysis includes:

Company name

Share price

Market capitalization

Net debt

Enterprise value

Revenue

EBITDA

EPS

Analyst estimates

The above information can be organized as shown in our example

comparable companies analysis shown below.

To learn more about this process, see our Business Valuation Course.

4. Calculate the comparable ratios

With a combination of historical financials and analyst estimates
populated in the comps table, it’s time to start calculating the various

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ratios that will be used to value the company in question.

The main ratios included in a comparable company analysis are:

EV/Revenue

EV/Gross Profit

EV/EBITDA

P/E

P/NAV

P/B

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5. Use the multiples from the comparable companies to value the

company in question
Analysts will typically take the average or median of the comparable
companies’ multiples and then apply them to the revenue, gross profit,
EBITDA, net income, or whatever metrics they included in the comps
table.

In order to come up with a meaningful average, they often remove or

exclude outliers and continually massage the numbers until they seem
relevant and realistic.

For example, if the average P/E ratio of the group of comparable

companies is 12.5 times, then the analyst will multiply the earnings of
the company they are trying to value by 12.5 times to arrive at their
equity value.

Formatting the Table

For a good financial analyst, formatting matters a lot!  In the tables
shown above, you can see what type of formatting is recommended.

It’s important to clearly separate market data, financial data, and the
multiples into separate sections, so the reader can easily follow the
information.

Multiples should have an “x” next to them (which we explain how to do in

our free Excel Crash Course) and should be to one decimal place.

The average or median section should be clearly separated at the

bottom of the table and indicate if any adjustments have been made.
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Interpreting the Results

Once the numbers are complete and the comps table is finalized, it’s
time to start interpreting the results.  One way to use the information is
to look for companies that are overvalued or undervalued.  Comps can
help you uncover the opportunities, but the results need to be
interpreted carefully as they don’t include any qualitative factors
whatsoever.

To properly evaluate the numbers in the comps table you have to

understand why numbers are what they are.  Why does Company A trade
at a discounted EV/EBITDA multiple to Company B?

Is it because it’s undervalued and a good buying opportunity?

Or, is it because it has a much lower growth rate and requires more
CapEx spending?

Even though Company A trades at a lower multiple, it might actually be

“more expensive” than Company B!

This is where the art of being a great financial analyst comes into play.

Applications of Comparable Company Analysis

There are many uses for comps (or comparable companies analysis, or
market multiples, or whatever name you use for them).  Typically
performed by financial analysts and associates, the most common uses
include:

Initial Public Offerings (IPOs)

Follow-on offerings

M&A advisory

Fairness opinions

Restructuring

Share buybacks

Terminal Value in a DCF model

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Multiples and Financial Modeling

Multiples play a significant role in financial modeling.  They are
commonly used as the terminal value assumption in a Discounted Cash
Flow (DCF) model, with the most common assumption being an
EV/EBTIDA multiple based on currently observable prices in the market.

Multiples can also be used to tie the results of the financial model back
to reality.  If the result that comes out of the financial model implies a
30x EV/EBITDA multiple, and none of the comps are currently trading
about 12x, the model may require some adjusting.

For more on the art of financial modeling, please check out CFI’s wide
range of financial modeling courses.

How to Perform Comparable Company Analysis

More Resources from CFI

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Thank you for reading CFI’s guide to Comparable Company Analysis. At

CFI, we’re on a mission to help you advance your career.  Some of our
most popular free resources include:

Valuation Methods Guide

DCF Modeling Guide

How to be a Great Financial Analyst

Financial Modeling Best Practices

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