Bullet Proof Comps Recipe

Inspired by @APAE 's recent post as well as trying to further my goal to give back by posting meaningful content on WSO.

I know this is super basic, but rarely will people actually sit you down and teach you exactly how to do things. Yes, they will ask you do comps, but it is usually through trial and error before you get good at them. I want to give you a recipe for being good at them immediately while simultaneously instilling confidence in your superiors that you are good at them (perception is just as important as reality).

Today, I'll give my recipe for (near) bullet proof hand spread comps. It's assumed as a professional audience that you know how to do them generally. This post is intended to make sure you are completely bullet proof (and helps address common mistakes I often encounter).

Two High Level Themes: Look Right and Be Right

1. Instill Confidence ("Look Right"): Have answers to the right questions (go get or ask if you have to), preempt/anticipate concerns when delivering final product
2. Make it easy to check and verify especially if some numbers look funny ("Be Right")

EDIT: As I started writing this, it got to be unwieldy. As a result, I've restricted the content to focus on the right questions you should answer and general good habits you should develop.

Three Good Habits

1. Over Do Footnotes

. In my experience, you don't have to ask all the questions below, but when you are presenting comps to someone for the first time (if you haven't worked with them before), it is helpful to preemptively footnote the hell out of your comps with answers to these questions, clarify these adjustments and otherwise explain numbers that might look funny. 99+ percent of the time, when I was more junior handing this work up, my senior banker told me to cut a lot of the footnotes (was too distracting) for the final client version, but they were very appreciative and often asked me to include the fully footnoted version in their version of the book so they could be bulletproof in meetings.

2. Keep Backups Handy or Printed Out

. It also helps to have back ups from primary sources ready in case people want to dig deeper into calcs. Saving them on to the drive so that you can pull them up immediately gives a lot more confidence then if you have to re-find all your sources when asked. Having printed copies are even better.

3. Comments in Excel.

Anything worth footnoting is definitely worth commenting on in Excel. If you are meticulous, you will also comment where your sources are (especially for items which are not normal course, special adjustments or create odd outputs)

As people get more comfortable, you'll find you don't have to do these things as often. But not bad habits to instill at the outset while you are building your initial reputation.

Now for some specifics.

Let's focus on EV/EBITDA multiples as an example.


First, rather than reinvent the wheel, I'm going to post a link to my previous post on getting the "right EBITDA": "Sources and Uses: How to Find and Use Information in IBD (EBITDA example)"

Enterprise Value

The next step is calculating the EV. Let's use the following simple definiton of EV:
EV = (1) Market Cap + (2) Total Debt - (3) Cash + (4a) Minority Interest - (4b) Investments + (5) Other Adjustments

(1) Market Cap Questions to Address:

  • Does the company have a dual share structure? How does each share class trade?
  • Are the options, warrants (other dilutive instruments) in the money?
  • How should I deal with share dilution? TSM?
  • Should I calculate based on vested options or total?
  • How real are phantom, performance, restricted stock/units? Should they be included in FDSO?
  • Did the company do an equity raise since their filing date on the balance sheet? Do you need to adjust
  • share count and cash balance for proceeds net of fees?

  • Has the company done a share buy back since their filing date?

Also, if your company has high SBC (often included in Adj. EBITDA), chances are they have a high number of dilutive instruments.

(2) Total Debt Questions to Address:

  • Is any of the debt trading above par/face value? (Rarely, but it happens occasionally)
  • Should I be using principal value of debt or carrying value?
  • Is any of the debt callable?
  • Is any of the debt convertible? Is it in the money? How many shares does this represent?
  • Did the company issue any new debt paper since their filing date on the balance sheet? Do you need to adjust debt balances and cash balance for proceeds net of fees?

(3) Cash Questions to Address:

  • Is there restricted cash? How should it be treated? Is it restricted to be applied against deferred revenue or is it held against debt (more capital structure related)?
  • Technically/Academically EV should be calculated using "Excess Cash", but uniformly I've seen most firms just assume all cash on the B/S as being "excess". I've seen some people spread junior tech/mining or other earlier stage/cash flow negative companies not backing out the cash as it is assumed to be "burned" and not really "excess"

(4) Minority Interest and Investments Questions to Address:

  • Remember, if something contributes value (captured in market cap) but does not contribute to EBITDA, it should be backed out of EV (Investments) for multiple comparability purposes
  • If something contributes to consolidated EBITDA, but is not owned by the company (minority interest) it's value should be added to EV for comparability purposes
  • How are they valued? What is the % ownership? What accounting method is being used? Are they valued based on their historical accounting costs?
  • Are the investments STI and liquid?
  • Are the investments publicly traded? Some companies hold shares of other companies and only report the value as of the date of filing. You can update for actual market value, which is important especially if the company holds a significant portion of the investment expressed in $ or % (or if the value has moved dramatically since filing)
  • Does the investment contribute to Adj. EBITDA? Occasionally (but rarely), I've seen instances where because the investment of the stake was strategically related to the company's primary business, they included it's earnings as part of Adj. EBITDA contribution in the reconciliation to GAAP Net Income. Be wary.

(5) Other Adjustments Questions to Address:

  • Did the company do any material acquisitions in the last year? When did they close? How much Revenue/EBITDA contribution do you need to adjust for (both LTM and forward)? How is research giving credit for synergies?
  • Is there a high chance to close? Is the stock price reflecting the transaction actually happening? Are research forecasts reflecting the PF entity?
  • How were recent acquisitions paid for? Did they issue shares (need to PF adjust share count), raise new debt, use balance sheet cash?
  • What were the synergies? Revenue vs. cost? How should you account for them? What's the ramp up schedule? Should you give 100% credit? Credit "as achieved" or "run-rate"?
  • Are there any significant costs to achieve for the synergies? How should they be treated?
  • Does this business rely heavily on PP&E (Real estate, planes, trains and automobiles)? Does it own or rent? Do I need to capitalize or otherwise adjust for rent expense and debt in order to make this multiple more comparable?

A quick way to check your work:

  • Open up a recent reputable research report. Put your lock in date to match the research report date (to get your EV based on the same share price as the research report)
  • Does your prior FY EBITDA match theirs?
  • Does your multiple match theirs?
  • Reconcile the deltas until you understand what research is (or is not) including in its EV and EBITDA calcs

This post got much bigger than I expected pretty quickly and I didn't even really cover everything I wanted (as a recipe I was originally planning on posting answers with the questions, but decided to leave that as an "exercise for the reader").

Please comment with any other suggestions and recommendations for the audience.


Comments (19)

Mar 15, 2018

Thank you for taking the time to write this up. +SBed

Mar 15, 2018

Exceptionally helpful, as are all of TorontoMonkey's posts. Would love to see comparable posts for more advanced topics. This one post captured virtually 100% of all errors and points of confusion I've witnessed.

    • 1
Mar 16, 2018

I just have a template to pull FDS codes and then make some manual adjustments where I know there's been an acquisition. What you're suggesting must take hours rather than seconds!

    • 1
Mar 16, 2018

Yes, it does the first time. Afterwards it should only take you fifteen minutes per company because you know which questions you can skip (and exactly where to find the data).

I find using FDS, CapIQ or Bloomberg might work if you know the comps better and can eyeball if numbers look off. If I am doing it for the first time, it doesn't give me enough confidence they are right so I need to thoroughly recheck them (and it doesn't save much effort in the end).

    • 1
Mar 17, 2018

15 minutes per company? Does your job entail only spreading comps? When my boss asks me to throw the XX sector comps (50 companies) into the deck, I hit FactSet refresh and throw the pages in. WTF??

    • 1
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Mar 16, 2018

Wow, this is one exceptional piece. Keep up the great work ! I would also love to see more of these posts on best practices, tips and methodology for "Intern Tasks". Anyways, major kudos for this one.

Mar 16, 2018

He has some other great posts, check his profile, you can find them there

Mar 16, 2018

More awesome & relevant content. Love this

Mar 16, 2018

Great content... would you be willing to post a template of one such model you made?

Mar 16, 2018

All your stuff is golden. As a student with an internship locally now and an internship this summer, you bring great advice. SB'd

Mar 17, 2018

@TorontoMonkey1328 this is really solid.

Great work and really comprehensive. For everyone's benefit, when you wrote "Open up a recent reputable research report", what are some of your favorite sources?

@WallStreetOasis.com You should front-page this (and the other high-caliber, detailed stuff he has written in the past). Actually, @AndyLouis, you used to 'refresh' some of my old content to surface it to the top of the forums, maybe do that with some of his?

    • 1
Mar 17, 2018

yeah good idea, i'll put some of his older posts in the coming weeks

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Best Response
Mar 16, 2018

I don't want to name specific names for fear of offending people, but it's the same top tier banks that you would want to work for. If you're doing smaller, not as well covered companies, then you take what you can get.

Having said that, I specifically say "Reconcile the deltas until you understand what research is (or is not) including" because I don't always agree with what research does.

    • 2
Mar 19, 2018

Great post!

@TorontoMonkey1328 imagine a scenario where you need a graph showing the multiples for a certain company over time - I assume that is conceded to CapIQ pull? Also curious to hear how far back your bank's compsets go, is someone updating these every earnings release? (depending on team size I can see these going stale quickly?)

Also how do you think about some of the mega mergers with high regulatory bars to cross? For example Bayer/Monsanto has been announced for well over a year now, if you were making a compset today would you pro-forma the combined companies or do them separately?

    • 1
Mar 16, 2018

Oh god. I had to do this before. Yes, pull CapIQ for something like this, but be warned: make sure your "current multiple" ties to your comps and beware of odd "steps" in the chart.

Example: unless they've fixed it, CapIQ pulls LTM EBITDA as of the date of the 10-x, not the 8-K/press release. So if they release the 8-K significantly before the 10-x (usually with annuals) your multiples chart will have a step function up and down as the share price reacts to the news in a different way then the EBITDA is actually reported.

I once had to spread net debt for three companies over the past five years MANUALLY and annotate any capital markets transactions (debt raise, equity raise to repay debt etc.) That's 5 years with 4 quarters per year for 3 companies (so effectively 60 comps by hand, with interim adjustments). I cheated on the debt refinancings (minimal change attributable to fees only) but god d'mn that was awful.

For large transactions where you aren't sure the certainty to close, do some merger arb math to see where the market is pricing the probability to close. Also check to see what research is saying. If people are assuming high chance of closing, PF for the merger.

    • 2
Mar 20, 2018

Great post, and very helpful for any new people in banking. I always tell new joiners that the most important thing in the first months is to understand the why behind tasks or why v2 is significantly better and different than v1. This post definitely helps with that.

Mar 30, 2018

Great post - and advice! Having answers ready to these questions definitely will earn merit in building confidence