Comparable company analysis is a way to determine how much a company is worth by comparing it to other companies of similar size in similar industries. Finance and investment banking professionals rely on comparable company analysis to inform mergers and acquisitions (M&A) and investing decisions. Other names professionals sometimes use for comparable company analysis include comps analysis, comparable analysis, comps valuation, or public comps valuation.
What Is Comparable Company Analysis Used For?
Investment bankers, corporate finance professionals, and financial analysts use comparable company analysis to compare different companies’ enterprise value. Enterprise value is the value of the entire company, including shareholder stakes, all assets, and the value of the company’s debt: how much is all of the company put together worth?
Knowing a company’s enterprise value can inform many investing decisions. For example, people working in private equity may use comps analysis to determine if a company is overvalued (bad investment) or undervalued (good investment). Additionally, comparable analysis is useful in mergers and acquisitions —- if you want to buy a business, it’s helpful to see what similar companies were bought and sold for.
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How to Do a Comparable Company Analysis
A comps analysis gives a company’s relative value — how much it should be worth based on how it compares to other companies. Other methods of business valuation, like a DCF valuation, give an intrinsic value, or how much it’s worth based on internal financial factors.
Completing a comparable analysis follows these general steps:
1. Choose the right peer group.
A peer group is a set of companies you want to compare. Choosing companies to compare is ultimately the hardest step because some factors are subjective. In general, comparable companies are in the same industry and a similar size. Other important similarities to look for are: geographic location, revenue, assets, number of employees, growth rates, and profitability.
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2. Pull financial data.
The financial information you need depends heavily on the companies themselves. For example, if you’re comparing relatively young companies, there’s more meaningful information in the company’s annual revenue than there would be in projected earnings — a young company may not have the historical data to accurately predict future earnings.
Key financial metrics to consider in a comps analysis are:
- Share price: cost for one share of the company
- Market capitalization: total value of all company shares held by stockholders
- EBITDA: earnings before interest, taxes, depreciation, and amortization (a measure of profitability)
- Revenue: the amount of money generated from sales
- Enterprise value: how much the whole company is worth
With the chosen companies and their respective data, create a table that details the data to make the comparison process easier.
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3. Calculate the ratios.
Comparable analysis relies on ratios such as enterprise value versus revenue, or enterprise value versus EBITDA. These ratios make comparing companies easier because they put the data in the same, easier-to-digest format for each company.
For instance, without a ratio, you would have to compare each company’s revenue individually, without consideration of how their earnings relate to debt or share price. Ratios allow an analyst to compare metrics with more context.
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How to Show Comps Analysis Skills on Your Resume
Comparable company analysis is a form of valuation, so you can combine it with other valuation methods on your resume. For example, in the skills section of your resume, you can note that you have “valuation skills, including comps and DCF valuation.”
Another way to include comparable company analysis on your resume is to mention it as part of prior work or internship experience. If you’ve completed a comparable analysis from start to finish as part of an internship, for example, you can note that in the internship’s description.
>>MORE: Learn more ways to include hard skills in your resume.
Related Investing Skills
Knowing how to do a comparable company analysis is a key skill for many finance professionals, especially investment bankers. Other skills that are vital for succeeding in investing careers include:
- Using Excel
- Completing discounted cash flow (DCF) valuations
- Understanding investing terms and topics, including common stocks
- Calculating compound annual growth rates (CAGRs)
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