A method for determining the current value of a company by using a sample of ratios from comparable peer groups (either from publicly traded comparables = "Trading Comps" or transactions for companies that are similar = "Transaction Comps").
The specific ratio to be used depends on the objective of the valuation. The valuation could be designed to estimate the value of the operation of the business or the value of the equity of the business.
When calculating the value of the operation the most commonly used ratio is the EBITDA multiple, which is the ratio of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) to the Enterprise Value (Equity Value plus Net Debt). When valuing the equity of a company, the most widely used multiple is the Price Earnings Ratio (PER) of stocks in a similar industry, which is the ratio of Stock price to Earnings per Share of any public company. Using the sum of multiple PERs improves reliability but it can still be necessary to correct the PER for current market conditions.
