Comparable Company Analysis: Trading Multiples Guide

Introduction: What the Market Is Willing to Pay

“What’s the company worth? Let’s see what similar companies are trading at.”

Comparable Company Analysis, often called “trading comps” or “relative valuation,” values a company by comparing it to similar publicly traded companies. It’s one of the most widely used valuation methods in investment banking and equity research.

The Logic of Comparable Analysis

Fundamental Premise

Similar companies should trade at similar valuations relative to their financial metrics.

How It Works

1. Identify similar publicly traded companies
2. Calculate their valuation multiples
3. Apply those multiples to your target company

Formula

$$Target\ Value = Target\ Metric \times Comparable\ Multiple$$

Example

If similar companies trade at 10x EBITDA, and your company has EBITDA of ₹50 crore:

$$Value = ₹50\ crore \times 10 = ₹500\ crore$$

Step 1: Select Comparable Companies

Selection Criteria

Primary Criteria:

1. Industry: Same sector and sub-sector
2. Geography: Similar market exposure
3. Size: Comparable revenue/market cap
4. Growth: Similar growth profiles
5. Profitability: Comparable margins

Secondary Criteria:

• Business model similarity
• Customer base overlap
• Competitive positioning
• Stage of business lifecycle

Finding Comparables in India

Sources:

• BSE/NSE sector classifications
• Bloomberg/Reuters industry codes
• Industry reports
• Brokerage research

Example: IT Services Company

Creating the Peer Universe

Narrowing Down:

How Many Comparables?

• Minimum: 3-4 companies
• Optimal: 5-8 companies
• Maximum: 10-12 companies

Quality over quantity—better to have 5 true comparables than 12 loose ones.

Step 2: Calculate Valuation Multiples

Enterprise Value Multiples

Enterprise Value (EV): $$EV = Market\ Cap + Debt - Cash + Minority\ Interest + Preferred$$

Common EV Multiples:

Equity Multiples

Common Equity Multiples:

Industry-Specific Multiples

Banking:

• P/B (Price to Book)
• P/E (Price to Earnings)
• P/PPOP (Price to Pre-Provision Operating Profit)

Real Estate:

• P/NAV (Price to Net Asset Value)
• EV/Asset Value

Telecom:

• EV/Subscriber
• EV/EBITDA

E-commerce:

• EV/GMV (Gross Merchandise Value)
• EV/Revenue

Calculating Multiples: Example

Company: ABC Ltd

• Market Cap: ₹500 crore
• Debt: ₹100 crore
• Cash: ₹20 crore
• Revenue: ₹200 crore
• EBITDA: ₹40 crore
• Net Income: ₹25 crore
• Shares: 10 crore

Calculations:

• EV = 500 + 100 - 20 = ₹580 crore
• EPS = 25/10 = ₹2.5
• EV/Revenue = 580/200 = 2.9x
• EV/EBITDA = 580/40 = 14.5x
• P/E = 50/2.5 = 20x (Price = 500/10 = ₹50)

Step 3: Build the Comps Table

Standard Comps Output

Trading Comparables (₹ crore except per share):

Statistics to Calculate

1. Mean (Average): Sum ÷ Count
2. Median: Middle value (less sensitive to outliers)
3. High: Maximum in range
4. Low: Minimum in range
5. Standard Deviation: Measure of spread

Which Statistic to Use?

Mean: When comparables are similar Median: When outliers exist Range: For valuation range presentation

Step 4: Apply Multiples to Target

The Application Process

Target Company Metrics:

• Revenue: ₹150 crore
• EBITDA: ₹35 crore
• Net Income: ₹20 crore

Valuation Matrix

From Enterprise to Equity Value

For EV multiples: $$Equity\ Value = EV - Net\ Debt$$

Example:

• Implied EV: ₹380 crore
• Target Debt: ₹30 crore
• Target Cash: ₹5 crore
• Net Debt: ₹25 crore

$$Equity\ Value = 380 - 25 = ₹355\ crore$$

Valuation Range

Based on Multiple Range:

Adjustments and Considerations

Calendarization

Align fiscal years when companies have different year-ends.

Example:

• Company A: March year-end
• Company B: December year-end

Solution: Use LTM (Last Twelve Months) or NTM (Next Twelve Months) metrics.

Non-Recurring Items

Normalize for:

• One-time gains/losses
• Restructuring charges
• Unusual legal settlements
• Discontinued operations

Example:

• Reported EBITDA: ₹40 crore
• Less: One-time insurance recovery: ₹5 crore
• Normalized EBITDA: ₹35 crore

Size Premium/Discount

Smaller companies typically trade at lower multiples due to:

• Lower liquidity
• Higher risk
• Less market coverage

Adjustment: Apply size discount (10-20%) for significantly smaller targets.

Growth Differential

Higher growth = Higher multiple

Using PEG Ratio: $$PEG = \frac{P/E}{Growth\ Rate}$$

If target grows faster than comps: Adjust multiple upward

Control Premium

Trading comps reflect minority stake prices. For control acquisition:

Add Control Premium: Typically 20-40%

Common Multiples Deep Dive

EV/EBITDA

Most Widely Used Because:

• Capital structure neutral
• Less affected by accounting differences
• Focuses on operating performance

Limitations:

• Ignores capex requirements
• EBITDA can be manipulated
• Doesn’t work for negative EBITDA

Typical Ranges by Sector:

P/E Ratio

Advantages:

• Simple, widely quoted
• Directly relates to stock price
• Good for stable earnings

Limitations:

• Affected by capital structure
• EPS can be manipulated
• Doesn’t work for losses

When to Use:

• Profitable companies
• Similar leverage levels
• Stable earnings

P/B Ratio

Best for Banks Because:

• Balance sheet is the business
• Book value reflects tangible equity
• Traditional bank metric

Interpretation:

• P/B < 1: Trading below book value
• P/B = 1: Trading at book value
• P/B > 1: Premium to book value

EV/Revenue

When to Use:

• Companies without profits
• High-growth companies
• Cross-border comparisons

Limitations:

• Ignores profitability
• Misleading for different margin profiles

Quality of Comparables Analysis

Red Flags in Comps

1. Wide multiple range: Comps may not be truly comparable
2. Outliers: Need investigation and potential exclusion
3. Negative multiples: Company issues, exclude
4. Recent M&A: May distort trading prices

Improving Comparability

Segment Analysis: When conglomerates are involved, use sum-of-parts with segment-specific comparables.

Adjustment Example:

Comps vs Other Methods

Comps vs DCF

When to Use Comps

Best For:

• Quick valuations
• Market-based pricing
• When good comparables exist
• IPO pricing

Not Ideal For:

• Unique companies (no good comps)
• Distressed situations
• When markets are dislocated

Best Practices

Peer Selection

1. Start broad, narrow down: Industry → Similar size → Similar profile
2. Document selection criteria: Why included, why excluded
3. Update regularly: Markets and companies change

Multiple Selection

1. Use multiple multiples: Don’t rely on just one
2. Understand drivers: Why are multiples different?
3. Check for reasonableness: Do multiples make sense?

Presentation

1. Show your work: Full comps table
2. Provide ranges: Not single point estimates
3. Disclose adjustments: Calendarization, normalization
4. Compare to DCF: Triangulation

Key Takeaways

1. Comps = Relative valuation – Based on market prices
2. Peer selection is critical – Quality of comps drives quality of valuation
3. Multiple choice matters – Different multiples for different situations
4. Mean or Median – Depends on outliers and distribution
5. Adjust for differences – Size, growth, profitability
6. Show a range – Not a single number
7. Triangulate – Use with DCF and precedents

Disclaimer

This article is for educational purposes only. Valuation requires professional judgment and understanding of company specifics. Consult qualified professionals for actual valuations. This is not investment advice.

Frequently Asked Questions

Q: What if there are no good comparables? A: Consider adjacent industries, international comparables, or rely more heavily on DCF and other methods. Document limitations clearly.

Q: Should I use forward or trailing multiples? A: Forward (NTM) multiples are more relevant for growth companies and price discovery. Trailing (LTM) for accuracy and verification. Present both when possible.

Q: How do I handle a comp with much higher/lower multiples? A: Investigate the reason (growth, margins, one-time factors). Consider excluding if truly not comparable. Document the decision.

Q: EV/EBITDA or P/E? A: EV/EBITDA for comparing companies with different capital structures. P/E when leverage is similar and for equity-focused analysis.

Q: How often should comps be updated? A: For live transactions—daily or weekly. For research—monthly or quarterly. Market prices change, so multiples should be current.

Trading comps are like finding the price of a house by looking at what similar houses sold for in your neighborhood. The key is defining “similar” correctly—same neighborhood, similar size, comparable condition. The better your comparables, the more reliable your valuation.