Financial Modeling & Valuation
Module 4: Comparable Company Analysis
Module Overview
Comparable Company Analysis, commonly called "Trading Comps" or simply "Comps," is the most widely used valuation methodology in investment banking. It answers a simple question: What is the market paying for similar companies?
Unlike DCF, which derives intrinsic value from fundamentals, comps derive value from market prices. This makes it faster and more grounded in current market conditions—but also subject to market inefficiencies.
Learning Objectives:
By the end of this module, you will be able to:
- Select appropriate comparable companies
- Calculate key valuation multiples (EV/EBITDA, P/E, EV/Revenue)
- Normalize earnings and adjust for non-recurring items
- Spread a comp set and derive statistics
- Apply multiples to derive a valuation range
- Understand the strengths and limitations of trading comps
Estimated Time: 4-5 hours
4.1 Understanding Comparable Company Analysis
What Are Trading Comps?
Trading comps value a company based on how similar public companies are priced. The logic:
"If Company A trades at 10× EBITDA, and Company B is similar to Company A, then Company B should also be worth approximately 10× its EBITDA."
The Process:
- Identify comparable companies
- Calculate their valuation multiples
- Apply those multiples to your target company
- Derive implied valuation range
Why Use Comps?
Advantages:
- Market-based: Reflects current investor sentiment
- Simple: Quick to calculate once peers are identified
- Defensible: "The market values these companies at X"
- Real-time: Updates daily with stock prices
Disadvantages:
- Market may be wrong (irrational exuberance or pessimism)
- "Comparable" is subjective—no two companies are identical
- Ignores company-specific factors
- Circular logic: You value based on market values
When to Use Comps
Comps work best when:
- Sufficient comparable companies exist
- The market is relatively efficient
- Companies are truly similar in business model, size, and growth
- You need a market-grounded sanity check
Comps work poorly when:
- The company is unique (no true peers)
- The market is in dislocation (crisis, bubble)
- Companies have vastly different characteristics
- Non-recurring items distort earnings
4.2 Selecting Comparable Companies
Criteria for Comparability
The art of comps is selecting the right peers. Key criteria:
1. Industry and Business Model Companies should operate in the same sector with similar business models.
- SaaS software company → Other SaaS companies
- Quick-service restaurant → Other QSR chains
- Regional bank → Other regional banks
2. Size Size matters for valuation. Larger companies often trade at premiums.
- Market capitalization
- Revenue scale
- Enterprise value
Rule of thumb: Peers within 0.5× to 2× target's size are most comparable.
3. Growth Profile Fast-growing companies trade at higher multiples.
- Revenue growth rate
- EBITDA growth rate
- Compare 3-year CAGRs
4. Profitability Companies with different margin profiles trade differently.
- EBITDA margins
- Operating margins
- ROE/ROIC
5. Geographic Mix Where revenue comes from affects risk and growth.
- Domestic vs. international
- Developed vs. emerging markets
6. Capital Structure Leverage affects equity multiples (P/E).
- Debt/EBITDA
- Debt/Equity
Building the Peer Set
Step 1: Start Broad List all companies in the same industry. Sources:
- Industry databases (Capital IQ, Bloomberg)
- Sector ETF holdings
- Company 10-K (lists competitors)
- Analyst reports
Step 2: Apply Filters Narrow based on:
- Size (market cap within range)
- Geography (same region focus)
- Business model (pure-play vs. diversified)
Step 3: Prioritize Rank peers by comparability. Identify:
- "Best comps" (closest to target)
- "Relevant comps" (reasonably similar)
- "Loose comps" (same industry but different)
Step 4: Document Rationale Explain why each company is included or excluded.
Example Peer Selection
Target Company: MidTech Corp (enterprise software, $2B revenue, 15% growth, 25% EBITDA margin)
Peer Selection for MidTech Corp
────────────────────────────────────────────────────────────────────────
Company Revenue Rev Growth EBITDA% Include? Rationale
────────────────────────────────────────────────────────────────────────
SoftwareCo A $1.8B 18% 28% Yes Closest comp
TechVenture $2.5B 12% 22% Yes Similar scale
CloudFirst $3.5B 25% 30% Yes Relevant, faster growth
DataSystems $0.8B 8% 15% No Too small, slower
MegaSoft Inc $15B 10% 35% No Too large, different stage
HardwareTech $2.0B 10% 20% No Hardware, not software
────────────────────────────────────────────────────────────────────────
How Many Peers?
- Minimum: 4-5 companies (for statistical validity)
- Optimal: 8-12 companies (balance of depth and manageability)
- Maximum: 15-20 companies (beyond this, less comparable peers dilute the analysis)
4.3 Key Valuation Multiples
Enterprise Value Multiples
Enterprise value multiples compare enterprise value to pre-interest metrics:
EV/EBITDA (Most Common)
EV/EBITDA = Enterprise Value / EBITDA
- Why EBITDA? Approximates operating cash flow, unaffected by capital structure or D&A policies
- Typical ranges: 5× to 15× (varies by industry)
- Higher for: Growing companies, asset-light businesses
- Lower for: Mature companies, capital-intensive industries
EV/EBIT
EV/EBIT = Enterprise Value / Operating Income
- Accounts for depreciation (useful for capital-intensive companies)
- Less common than EV/EBITDA
EV/Revenue (EV/Sales)
EV/Revenue = Enterprise Value / Revenue
- Used when earnings are negative or volatile
- Common for: SaaS companies, high-growth tech, early-stage companies
- Typical ranges: 1× to 10× (highly variable)
Equity Multiples
Equity multiples compare market cap (or equity value) to post-interest metrics:
P/E Ratio (Price-to-Earnings)
P/E = Share Price / Earnings per Share
or
P/E = Market Cap / Net Income
- Most widely quoted multiple
- Affected by capital structure (interest expense)
- Typical ranges: 10× to 30× for profitable companies
- Note: Not meaningful for companies with negative earnings
P/B Ratio (Price-to-Book)
P/B = Share Price / Book Value per Share
or
P/B = Market Cap / Shareholders' Equity
- Useful for: Banks, financial institutions, asset-heavy companies
- Compares market value to accounting value
Which Multiple to Use?
| Multiple | Best For | Avoid When |
|---|---|---|
| EV/EBITDA | Most industries, comparing across capital structures | EBITDA is negative or meaningless |
| EV/Revenue | High-growth, unprofitable companies | Mature, profitable companies |
| P/E | Profitable companies with stable earnings | Earnings are negative or volatile |
| EV/EBIT | Capital-intensive industries | D&A is minimal |
| P/B | Banks, asset-heavy businesses | Intangible-heavy companies |
Best practice: Calculate multiple multiples and triangulate.
4.4 Calculating Enterprise Value
Enterprise Value Formula
Enterprise Value = Market Cap + Total Debt - Cash + Preferred Stock + Minority Interest
Why this formula? Enterprise value represents what it would cost to acquire the entire company:
- You pay for the equity (market cap)
- You assume the debt
- But you receive the cash on hand
Detailed Calculation
Enterprise Value Calculation ($M)
────────────────────────────────────────────────────
Market Capitalization 1,500
(Share Price × Shares Outstanding)
+ Total Debt 300
- Short-Term Debt 50
- Long-Term Debt 250
- Capital Leases 0
- Cash & Cash Equivalents (150)
- Short-Term Investments (25)
+ Preferred Stock 0
+ Minority Interest 15
────────────────────────────────────────────────────
Enterprise Value 1,640
Key Considerations
Debt:
- Include all interest-bearing debt
- Include capital leases (now on balance sheet per ASC 842)
- Some analysts include pension obligations and operating lease liabilities
Cash:
- Subtract only excess cash (some argue operating cash should stay)
- In practice, most subtract all cash and equivalents
Minority Interest:
- If consolidated financials include a subsidiary not 100% owned, the minority stake should be added to EV
- The EBITDA includes 100% of the subsidiary, so EV should too
4.5 Calculating and Normalizing Multiples
LTM vs. NTM
LTM (Last Twelve Months):
- Based on actual historical results
- Calculate by summing last 4 quarters
- More objective but backward-looking
NTM (Next Twelve Months):
- Based on analyst consensus estimates
- Forward-looking, reflects expected performance
- Requires access to consensus data
Example:
If today is March 15, 2025:
LTM EBITDA = Q2 2024 + Q3 2024 + Q4 2024 + Q1 2025 (estimated)
NTM EBITDA = Consensus estimate for next 12 months
Best practice: Calculate both LTM and NTM multiples.
Normalizing for Non-Recurring Items
EBITDA and earnings should reflect ongoing operations. Adjust for:
Common Adjustments:
- Restructuring charges
- Litigation settlements
- Asset impairments
- Gains/losses on asset sales
- One-time transaction costs
- Unusual severance
- Natural disaster impacts
Example:
Reported EBITDA: $150M
+ Restructuring charges $8M
+ Litigation settlement $5M
- Gain on asset sale ($3M)
────────────────────────────────────
Adjusted EBITDA: $160M
Important: Use adjusted EBITDA for multiples to ensure comparability.
Calendarization
Companies have different fiscal year-ends. To compare apples to apples, calendarize to a common period:
Example: Company A: December fiscal year-end Company B: June fiscal year-end
To get both as of December 31:
Company B Calendar Year EBITDA =
(6/12 × FY2024 EBITDA) + (6/12 × FY2025 EBITDA)
4.6 Spreading the Comp Set
Creating the Comps Table
A "comp sheet" or "spread" presents all peer data in a standardized format:
Trading Comps Analysis - Enterprise Software Sector
As of March 15, 2025
Market EV/EBITDA EV/Rev P/E
Company Price Shares Cap EV EBITDA LTM NTM LTM NTM
─────────────────────────────────────────────────────────────────────────────────────
SoftwareCo A $85.00 120M $10.2B $10.0B $850M 11.8× 10.5× 5.6× 24.2×
TechVenture $62.50 200M $12.5B $13.0B $980M 13.3× 11.8× 4.8× 28.5×
CloudFirst $125.00 80M $10.0B $10.5B $750M 14.0× 12.2× 7.0× 32.1×
DataPlatform $42.00 180M $7.6B $7.8B $620M 12.6× 11.0× 4.5× 21.8×
SaaSLeader $180.00 60M $10.8B $10.2B $720M 14.2× 12.5× 8.2× 35.0×
─────────────────────────────────────────────────────────────────────────────────────
Statistics:
Mean 13.2× 11.6× 6.0× 28.3×
Median 13.3× 11.8× 5.6× 28.5×
High 14.2× 12.5× 8.2× 35.0×
Low 11.8× 10.5× 4.5× 21.8×
Statistical Analysis
For each multiple, calculate:
- Mean: Average across peers
- Median: Middle value (less affected by outliers)
- 25th/75th Percentile: Shows the range
- High/Low: Full spread
Which to use?
- Median is often preferred (reduces outlier impact)
- Mean can be skewed by one extreme value
- Show the range to illustrate uncertainty
4.7 Applying Multiples to Derive Value
The Valuation Calculation
Once you have peer multiples, apply them to your target:
Implied Enterprise Value = Target's Metric × Multiple
Example:
Target EBITDA: $200M
Peer Median EV/EBITDA: 12.0×
Implied EV = $200M × 12.0 = $2,400M
Deriving a Valuation Range
Don't use a single multiple—use a range:
Implied Valuation from Trading Comps ($M)
────────────────────────────────────────────────────────────────────────
Target Multiple Range Implied EV
Metric Value Low Med High Low Med High
────────────────────────────────────────────────────────────────────────
EV/EBITDA (NTM) $220M 10.5× 11.8× 12.5× $2,310 $2,596 $2,750
EV/Revenue (NTM) $1,800M 4.5× 5.6× 7.0× $8,100 $10,080 $12,600
────────────────────────────────────────────────────────────────────────
Selected Range: $2,300M - $2,800M (based on EV/EBITDA)
Why the range matters: The "right" answer isn't a single number. Presenting a range acknowledges uncertainty and provides context for decision-making.
Bridging to Share Price
Implied Enterprise Value: $2,596M
- Total Debt: ($300M)
+ Cash: $150M
────────────────────────────────────────
Implied Equity Value: $2,446M
Shares Outstanding: 100M
────────────────────────────────────────
Implied Share Price: $24.46
Current Share Price: $22.00
Implied Premium: +11.2%
4.8 Adjusting for Differences
Why Adjustments Matter
No peer is identical to your target. Adjust for key differences:
Growth Differential Higher-growth companies deserve higher multiples. If your target grows faster than peers, apply a premium.
Margin Differential More profitable companies often trade at higher multiples. Adjust for margin differences.
Size Larger companies may trade at premiums (liquidity, stability) or discounts (less growth potential).
Quantitative Adjustments
Growth-Adjusted Multiple:
PEG Ratio = P/E ÷ EPS Growth Rate
If peer has PEG of 1.5× and target grows at 20%:
Implied P/E = 1.5 × 20% = 30×
Margin-Adjusted Multiple: Companies with higher margins often have higher EV/Revenue multiples. Regress EV/Revenue against EBITDA margin to quantify the relationship.
Qualitative Adjustments
Consider:
- Brand strength
- Market position
- Management quality
- Competitive dynamics
- Regulatory environment
- Liquidity (trading volume)
These are harder to quantify but should inform where in the range you value the company.
4.9 Common Pitfalls
Pitfall 1: Apples to Oranges
Comparing companies that aren't truly comparable:
- Different business models
- Different stages of development
- Different end markets
Solution: Be rigorous in peer selection. Document why each peer is included.
Pitfall 2: Ignoring Non-Recurring Items
Using reported EBITDA without adjustments:
- Restructuring charges inflate expenses
- Asset sales inflate income
Solution: Always calculate adjusted EBITDA. Be consistent across peers.
Pitfall 3: Using Stale Data
Stock prices and estimates change daily. Using old data leads to wrong conclusions.
Solution: Update your comps before every use. Date-stamp your analysis.
Pitfall 4: Ignoring Context
Multiples reflect expectations. A company trading at 8× vs. peers at 12× might:
- Be undervalued, or
- Have problems the market has priced in
Solution: Understand why a company trades where it does.
Pitfall 5: False Precision
Stating "the company is worth $2,584.3M" implies precision that doesn't exist.
Solution: Use ranges. Round appropriately. Acknowledge uncertainty.
4.10 Practical Exercise: Build a Comps Analysis
Exercise Instructions
Build a comparable company analysis for MidTech Corp:
Target Company Information:
MidTech Corp
- Industry: Enterprise Software
- LTM Revenue: $1,800M
- LTM EBITDA: $360M (20% margin)
- NTM Revenue Estimate: $2,050M
- NTM EBITDA Estimate: $430M (21% margin)
- Current Share Price: $45.00
- Shares Outstanding: 80M
- Total Debt: $200M
- Cash: $150M
Peer Data Provided:
Company LTM Rev LTM EBITDA Share Shares Debt Cash
($M) ($M) Price (M) ($M) ($M)
────────────────────────────────────────────────────────────────────
SoftwareCo A 1,500 315 $72.00 100 180 120
TechVenture 2,200 462 $55.00 150 250 200
CloudFirst 2,800 560 $95.00 70 150 300
DataPlatform 1,200 228 $38.00 120 100 80
Your Task:
- Calculate Enterprise Value for each peer
- Calculate EV/Revenue and EV/EBITDA multiples
- Calculate mean and median multiples
- Apply median multiples to MidTech's LTM metrics
- Derive implied Enterprise Value range
- Bridge to implied share price
- Compare to current trading price
4.11 Key Takeaways
Peer Selection
- Choose companies similar in industry, size, growth, and margins
- 8-12 peers is optimal
- Document your selection rationale
Key Multiples
- EV/EBITDA: Most widely used, capital-structure neutral
- EV/Revenue: For high-growth or unprofitable companies
- P/E: For profitable companies, but affected by leverage
Enterprise Value
EV = Market Cap + Debt - Cash + Preferred + Minority Interest
Normalization
- Adjust for non-recurring items
- Calendarize to common periods
- Use both LTM and NTM
Application
- Calculate multiple statistics (mean, median, range)
- Apply to target metrics
- Present a range, not a single number
Looking Ahead to Module 5
Trading comps tell you what the market pays for comparable companies today. But what have acquirers paid for similar companies in M&A transactions?
In Module 5, you'll learn Precedent Transactions Analysis—studying past acquisitions to understand control premiums and transaction multiples.
Summary
Congratulations on completing Module 4! You can now:
- Select appropriate comparable companies
- Calculate key valuation multiples
- Normalize financials for comparability
- Spread a comp set with statistics
- Apply multiples to derive valuation ranges
- Bridge from enterprise value to share price
Trading comps provide a market-based anchor for your valuation. Combined with DCF, you now have two powerful approaches.
Ready for transaction analysis? Proceed to Module 5: Precedent Transactions Analysis to learn what acquirers pay.
"The market can stay irrational longer than you can stay solvent." — John Maynard Keynes
But it still tells you something. Use it wisely.