Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which we compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method.
This method provides an observable value for the business, based on what companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current. The logic follows that, if company X trades at a 10-times P/E ratio, and company Y has earnings of £2.50 per share, company Y’s stock must be worth £25.00 per share (assuming its perfectly comparable).
One factor that needs to be carefully considered when applying this approach is determining the true underlying profitability of the company – its ‘normalised’ earnings.
For Private Companies, the comps valuation method can still be used, with an appropriate discount factor to reflect the relative illiquidity in the company’s shares. This discount is typically between 30 and 40%