Comparable companies
What is covered
A comparable companies analysis is one of the most widely used valuation methods in finance. It estimates a company’s value by analyzing how similar businesses are valued by the market today. Rather than focusing on intrinsic cash flow generation, comps rely on observable market data such as share prices, enterprise values, and trading multiples to benchmark valuation. By applying valuation multiples like EV/Revenue, EV/EBITDA, and P/E from comparable firms to a target company’s financials, this approach provides a market-based view of value that reflects current investor sentiment. Comparable companies' analysis is commonly used across investment banking, equity research, private equity, and corporate finance to support pricing, fairness opinions, and strategic decision-making.
What is a Comps model?
Like the intro says a Comparable Companies Analysis (Comps) is a relative valuation method used to estimate a company’s value by comparing it to similar companies. This can be used for public companies to find valuations for private companies (Since private companies do not have to share financials). The goal is to determine how the market is currently valuing businesses with comparable operating characteristics, size, growth, and risk profiles, and then apply those valuation benchmarks to the target company. This approach reflects real-time market sentiment and is commonly used in investment banking, equity research, private equity, and corporate finance.
"Can you walk me through a comps model?"
"A comps model is a relative valuation method that estimates a company’s value based on how similar public companies trade in the market. I would start by selecting a peer group with similar industry exposure, business models, size, and growth. I’d then calculate equity value and enterprise value for each company using share price, shares outstanding, and net debt.
Next, I’d gather key financial metrics like revenue, EBITDA, and net income and calculate valuation multiples such as EV/Revenue, EV/EBITDA, and P/E. After reviewing the range of multiples across the peer group, I’d apply an appropriate multiple to the target company’s financials to derive an implied enterprise or equity value, and then convert that into an implied value per share."
The below model is an incomplete comparable companies model. We will go through all of the parts and complete it as we go through the parts.
PT 1 - Selecting companies
Selecting peer companies
The process begins with selecting an appropriate peer group. These companies should operate in the same industry, have similar business models, revenue drivers, margin profiles, and growth prospects.
Once the peer set is established, market data is collected for each company, including share price, shares outstanding, equity value, net debt, and enterprise value. Equity value is calculated by multiplying share price by shares outstanding, while enterprise value is derived by adding net debt to equity value and subtracting cash. Enterprise value represents the value of the company’s core operations, independent of capital structure.
PT 2 - Gathering financials
Next, key financial metrics are gathered for each comparable company. These typically include revenue, EBITDA, and net income, which serve as the denominators for valuation multiples. These figures are usually based on last twelve months (LTM results or forward estimates, depending on the purpose of the analysis. Consistency across the peer group is important to ensure the multiples are meaningful. If one company has a significantly high multiple or there is a huge outlier either use a different multiple or take this into account when deciding whether to use median or mean.
PT 3 Valuation multiples
Once market values and financials are in place, valuation multiples are calculated. Common multiples include EV/Revenue, EV/EBITDA, and P/E. Enterprise value–based multiples are paired with operating metrics like revenue and EBITDA, while equity value–based multiples such as P/E are paired with net income. This is because EV is the value that is available to both debt and equity holders, so it needs to be compared to metrics that are available to both investors. Debt and equity investors have a take for revenue as interest and taxes have not been paid. Whereas net income is only available to equity investors as interest and taxes have been paid. These multiples show how much the market is willing to pay for each dollar of revenue, earnings, or cash flow generated by comparable companies.
After calculating multiples for each peer, the data is summarized using statistical measures such as the high, low, median, average, and percentile ranges. This step helps smooth out outliers and provides a reasonable valuation range rather than relying on a single data point. The selected multiple, often the median or average, is then applied to the target company’s financial metrics to estimate implied values. However, is you are bearish or bullish on the company than the 25th or 75th percentile can be selected. This can help account for different market opinions and sentiments.
PT 4 - Valuations
To value the target company, the chosen multiples are applied to its revenue, EBITDA, or net income to calculate an implied enterprise value or implied equity value. If an enterprise value is derived, net debt is subtracted to arrive at implied equity value. That equity value is then divided by shares outstanding to calculate the implied value per share. This results in a valuation range that reflects how the market prices similar companies today.
In summary, a comparable companies analysis provides a market-based approach to valuation by benchmarking a company against similar publicly traded peers. By selecting an appropriate peer group, calculating enterprise value and equity value, and analyzing valuation multiples such as EV/Revenue, EV/EBITDA, and P/E, this method translates current market pricing into an implied valuation range for the target company. When built carefully, comps offer a clear, intuitive view of how investors value comparable businesses today and serve as a practical tool to support pricing, investment decisions, and analysis.