Public comparable companies are one part of comparable analysis. It is the analysis of publicly traded companies operating in a similar sector and location to the valuation company, usually with similar levels of revenue and market capitalization. Determining the relevant trading multiples of these public companies will provide a benchmark to assess the valuation company and to see if it is over or undervalued.
Some advantages of using public comparable companies for valuation are that they have regular financial statements issued, they are operating in a stock market and are therefore subject to the same regulation and market pressures. However, valuations are usually done for the purpose of a merger or acquisition, and simply analysing public companies will not give much information about premiums paid in transactions or the economic climate or the willingness to purchase companies.
The process for conducting public comparable company analysis is as follows:
- Compile a full list of publicly traded companies in similar industries and / or of similar size.
- Narrow down the list to have 5-10 companies, preferably with similar revenues, market capitalizations, industries and geographical locations.
- Decide which multiples to use, the most common ones being EV / EBITDA, EV / Revenue and P / E.
- Calculate the average multiple values for the public companies and the relevant values for your company.
- Apply the average multiples to your company to gain an idea of how it would be valued in the public market
- Comparable Analysis
- Earnings Before Interest, Taxation, Depreciation & Amortization (EBITDA)
- Earnings Per Share (EPS)
- Enterprise Value (EV)
- EV / EBITDA
- EV / Revenue
- Financial Statements
- Market Capitalization
- Price to Earnings (EPS)
- Precedent Transactions
- Trading Multiple