The premise behind comparable company analysis is that a non-controlling interest in companies within the same industry or companies exhibiting similar underlying business fundamentals (e.g., growth, proﬁtability, risk, volatility, etc.) should be valued in the equity market on the same relative basis as a multiple of ﬁnancial and operating metrics.
Comparable companies (the “trading comp set”) are selected and ﬁnancial multiples are calculated for each of the companies in the trading comp set based on the current stock price of each company in the peer group. Examples of multiples include price to earnings (P/E), enterprise value to EBITDA (EV/EBITDA) and price to book (P/B).
Multiples from the trading comp set are then applied to the data of the company being valued in order to determine an implied valuation range for the company being valued.
Comparable company analysis is the best method for valuing a minority interest or for pricing an IPO (initial public offering of a company’s stock). It is not as useful of a method in a sale context since comparable company analysis does not include a control premium. Comparable company analysis is also referred to as comparable trading analysis.