Comparable Company Analysis: How to Value a Company Using Comps
How Comps Work
The logic is straightforward: similar companies should trade at similar valuations. If four comparable software companies trade at 15x EV/EBITDA on average, your target software company is probably worth roughly 15x its EBITDA too. The key is defining “similar” and understanding why differences exist.
Step-by-Step Process
| Step | Action | Key Considerations |
|---|---|---|
| 1. Select Comparable Companies | Build a peer universe of 5–15 companies | Industry, size, growth, geography, business model |
| 2. Gather Financial Data | Pull market data and financials for each comp | Market cap, enterprise value, revenue, EBITDA, net income |
| 3. Calculate Multiples | Compute key valuation ratios | Use forward (NTM) estimates, not trailing where possible |
| 4. Determine the Range | Analyze mean, median, and range of multiples | Exclude outliers, understand why multiples vary |
| 5. Apply to Target | Multiply target’s metrics by selected multiples | Use median or a justified point in the range |
| 6. Calculate Implied Value | Derive enterprise value or equity value | Bridge from EV to equity value per share |
Key Valuation Multiples
| Multiple | Formula | Best For |
|---|---|---|
| EV/EBITDA | Enterprise Value ÷ EBITDA | Most industries — capital-structure neutral |
| EV/Revenue | Enterprise Value ÷ Revenue | Pre-profit or high-growth companies (SaaS, biotech) |
| P/E Ratio | Share Price ÷ EPS | Profitable, stable companies |
| P/B Ratio | Share Price ÷ Book Value per Share | Banks, insurance, REITs |
| PEG Ratio | P/E ÷ Earnings Growth Rate | Growth-adjusted comparison |
| EV/EBIT | Enterprise Value ÷ EBIT | When D&A differs significantly across comps |
Selecting Comparable Companies
The quality of your analysis depends entirely on your peer selection. Screen on these criteria:
Industry/sector. Same GICS sub-industry is the starting point. A cloud software company should be compared to other cloud software companies — not hardware manufacturers.
Size. Companies with $500M market cap shouldn’t be compared to $100B mega-caps. Use a reasonable range (typically 0.5x to 3x of your target’s size).
Growth profile. A company growing 30% annually will naturally trade at higher multiples than one growing 5%. Group comps by growth rate when possible.
Margin profile. Operating margin differences explain much of the multiple variation within a peer group. Higher margins generally justify higher multiples.
Geography. US-focused analysis should primarily use US-listed comps. International peers may face different regulatory, tax, and currency environments.
Comps vs DCF vs Precedent Transactions
| Feature | Comps | DCF |
|---|---|---|
| Basis | Market-based (what investors pay now) | Intrinsic (what cash flows are worth) |
| Speed | Fast — hours to build | Slower — days to build properly |
| Objectivity | Market-driven, less assumption-heavy | Heavily dependent on your assumptions |
| Best Use | Quick valuation, sanity check, pitchbooks | Deep analysis, fairness opinions |
| Weakness | Market can misprice entire sectors | “Garbage in, garbage out” risk |
Key Takeaways
- Comps value a company by comparing its multiples to similar publicly traded peers — it’s the most common Wall Street methodology.
- EV/EBITDA is the most versatile multiple. Use EV/Revenue for pre-profit companies and P/E for mature, stable businesses.
- Peer selection is the most critical step — screen on industry, size, growth, margins, and geography.
- Understand why multiples vary across your peer group. Higher growth and margins justify higher multiples.
- Always use comps as part of a triangulated approach with DCF and precedent transactions.
Frequently Asked Questions
How many comparable companies should I include?
Aim for 5–15 companies. Fewer than 5 makes the analysis too narrow and sensitive to outliers. More than 15 dilutes the peer relevance. The sweet spot is 8–12 companies that are genuinely comparable in terms of business model, size, and growth profile.
Should I use trailing or forward multiples?
Forward (next twelve months, or NTM) multiples are preferred because investors value companies based on future expectations, not past results. Use consensus analyst estimates from Bloomberg or FactSet. Trailing multiples are useful as a sanity check or when forward estimates aren’t available.
What do I do with outliers in my comp set?
Flag them but don’t automatically remove them. Understand why they’re outliers — a company trading at 25x EBITDA when peers average 12x might have a recent acquisition, pending catalyst, or genuine competitive advantage. Use the median (less sensitive to outliers) rather than the mean, and present the full range to show dispersion.
How do I go from EV/EBITDA to a share price?
Apply the selected multiple to your target’s EBITDA to get enterprise value. Then bridge to equity value: EV − net debt − minority interests − preferred equity + equity investments = equity value. Divide by diluted shares outstanding to get implied share price. See our equity value vs enterprise value guide.
Can I use comps for private companies?
Yes, with adjustments. Private companies typically trade at a 15–30% discount to public peers (the “illiquidity discount” or “private company discount”) because their shares can’t be easily sold. Apply a discount to public multiples, or use precedent transaction multiples from similar M&A deals, which already reflect the private market.