Comparable Company Analysis

A DCF asks "what is this business worth on its own merits?" Comparable company analysis, or "comps," asks a different, often more practical question: "what does the market currently pay for businesses like this one?" It is relative valuation — you are not forecasting cash flows, you are benchmarking a price against a peer group and trusting the market to have priced the peers reasonably.

The process has three steps. First, build a peer set — companies in the same industry, of similar size, growth, margins and geography, because a multiple only transfers meaningfully between businesses that are actually alike. Second, calculate each peer's key multiples, usually EV/EBITDA, EV/Revenue and P/E, from their market values and financials. Third, apply the peer group's median multiple (not the mean, which one outlier peer can distort) to the target company's own metric to get an implied value.

$$EV_{\text{target}} = \text{Median EV/EBITDA}_{\text{peers}} \times EBITDA_{\text{target}}$$

A worked example

Five peer retailers trade at EV/EBITDA multiples of 7.0x, 8.5x, 9.5x, 11.0x and 14.0x. The median is 9.5x. The target company has EBITDA of $60m.

$$EV_{\text{target}} = 9.5 \times 60 = \$570\text{m}$$

Subtract net debt of $120m to get equity value: $570 - 120 = 450$, i.e. $450m. Divide by 30m shares outstanding for an implied share price of $15.00.

An analyst would then sanity-check the target against the peer set: if it grows faster than the median peer or has fatter margins, a premium above 9.5x is defensible; if it is smaller and more indebted, a discount is more honest than the raw median.

Comps and a DCF are meant to be run side by side: DCF gives an intrinsic anchor, comps give a market reality check, and a banker gets nervous when the two disagree by a wide margin.