Comparable Analysis Definition

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."

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

Comparable analysis can either be done using trading multiples (how the company operates) on public comparable companies 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

Related Terms

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