What are Trading Comparables and/or Transaction Comparables (aka "Comps")?
The most common way to value a company is through the use of comparable analysis. This method attempts to find a group of companies which are comparable to the target company and to work out a valuation based on what they are worth.
The idea is to look for companies in the same sector and with similar financial statistics (Price to Earnings, Book Value, Free Cash Flow, EBITDA etc) and then assume that the companies should be priced relatively similarly. Comparable analyses are frequently referred to as "comps."
comparables valuation process
The process for how to do a comparable analysis is as follows:
- Find a selection of comparable companies
- Choose and calculate the appropriate multiples for each company
- Find the average value of each multiple across the comparable companies
- Use the multiples to determine a valuation for the target company
You can see this process below:
Comparable analysis can either be done using trading multiples (how the company operates) on public comparable companies (pictured above) or transaction multiples (at what relative level was the company bought or sold) on precedent transactions.
Some of the most commonly used multiples are:
- Price to Earnings
- Enterprise Value / EBITDA
- Return on Equity
- Return on Assets
- Price to Book Value
Transaction Comparables Method
This is a method where you look what similar businesses have sold for from a ratio perspective.
The Transaction Multiples Method is the method that has you look at a group of companies similar to the one you are valuing, see what kind of prices they have been bought and sold for, and apply a similar valuation method to the target company.
In this example - we take three recent transactions and find the average Transaction Value / EBITDA. Then we take that average multiple and multiply it by the target companies EBITDA value to find an implied transaction value for the company.
In this case you are multiplying the EBITDA of $850 by the average industry TV/ EBITDA multiple of 11.1x to get an estimated transaction value of ~$9,741.
You can read more about this in a detailed post on WSO.
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