Comparable Company uses

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2.
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4.

M and A
Initial public offerings
Restructurings
Investment decisions

Foundation for trading comps

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4.

Share key business and financial characteristics

Performance drivers
Risk
Banker can establish valuation parameters among peer
companies

Common valuation multiples

1. Enterprise value to EBITDA
2. Price to earnings
3. Utilize a measure of value in the numerator and financial statistic
in the dominator
4. Multiple based on Enterprise value are used more often by
bankers because they are independent of factors unrelated to
business operations
Comparable companies analysis: Designed to reflect current
valuation based on prevailing market conditions and sentiment
Comparable companies vs. DCF
1. More relevant than DCF intrinsic valuation analysis
2. But market trading levels may be subject to periods of irrational
investor sentiment that skew valuation either too high or too low
Steps for comparable analysis
e
1. Select the universe of comparable companies
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Gain sound understanding of the target

First starting is to consult with peer to see if relevant set of
comparable companies already exists integrally
If beginning from scratch, the banker casts a broad net to
review as many potential comparable companies as possible

2. Locate the necessary financial information

- Calculate equals spread the financial statistics

3. Spread key statistics, ratios, and trading multiples
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involves calculating market valuation measures like enterprise

value and equity value, as well as key income statements
items, like EBITDA and net income
A variety of ratios and other metrics measuring profitability
Banker needs to employ concepts like LTM and calendarization
of company financials, and adjustment for non-recurring items

4. Benchmark the comparable companies

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determine the companies relative ranking and closest

comparable
Benchmarking: Laying out the calculated financial statistics
and ratios for comparable companies alongside those of the
target in a spreadsheet to make it easy to compare
Similarities in size, growth rates, margins, and
leverage

5. Determine valuation
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Trading multiples of comparable companies serve as the basis

for deriving a valuation range for a target
High and low multiples for comparable universe provide
guidance on ceiling and floor of the company
Use means and medians for relevant trading multiples as
basis for extrapolating an initial range

When a company with no clear, publicly traded comparable

1. Bankers seek companies outside the targets core sector that
share business and financial characteristic
Core business characteristics
1. Sector

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3.
4.
5.

- Conveys a great deal about its key drivers, risks, and

opportunities
Products and services
Customers and end market
Distribution channels
Geography

Geography business drivers and characteristics

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6.

growth rates
macroeconomic environment
competitive dynamics
paths to market
organizational and cost structure
potential opportunities and risks

Key financial characteristics are useful to:

1. Understand the target
2. Identify the best comparable companies
Financial characteristics
1. Size
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measured in terms of market valuation (equity and enterprise

value)
financial statistics like sales, gross profit, EBITDA/EBIT, and
net income)
reflects fact that companies are likely to be similar in areas
like economies of scale, purchasing power, pricing leverage,
customers, growth prospects, and trading liquidity of shares

2. Profitability
-higher profit margin leads to a higher valuation
3. Growth profile
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Determined by historical and estimated future financial

performance
Organic growth is held with more wait then from acquisitions
For mature public companies, EPS growth rates are
meaningful
For early stage or emerging companies, sales or EBITDA
growth trends are more relevant

4. Return on Investment

measure of companies ability to provide earnings to its capital

providers
Numerator is a measure of profitability like EBIT, NOPAT,
or net income
Denominator is a measure of capital like invested capital,
shareholders equity, or total assets

5. Credit profile
Fairness Opinion: Opines on the fairness of the purchase price and
deal terms offered by the acquirer in a M & A transaction.
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located in the proxy statement

supported by detailed overview of the methodologies used to
perform a valuation of the target

Methods of screening
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2.
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4.

SIC, NAICS, or other industry codes

Bloomberg Bloomberg industry classification standard BICS
Sector reports published by credit rating agencies
Senior bankers

8-k report: filed by a public registrant to report the occurrence of

material corporate events or changes that are of importance to
shareholders or security holders
Equity research reports
1. Provide individual analyst estimates of future company
performance, which may be used to calculate forward-looking
multiples
2. They include estimates of sales
Enterprise Value Multiples
EV represents interests of both debt and equity holders
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used as a multiple of unlevered financial statistics like sales,

EBITDA, and EBIT
EV multiples tend to focus on forward estimates in addition to
LTM statistics for framing valuation
Used to compare size

EV to EBITDA

1. serves as a valuation standard for most sectors

2. independent of capital structure and taxes and any distortions
that my arise from differences in Depreciation and amortization
EV to sales
1. Does not necessarily translate into cash or profitability
generation
2. Used as a sanity check on the earnings multiples

Benchmarking
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Centers on analyzing and comparing each of the comparable

companies with one another and the target
Objective: Determine the targets relative ranking so as to
frame valuation accordingly

Steps
1. Benchmark the financial statistics and ratios
2. Benchmark the trade ratios