Comparable Comps Analysis models

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What is a 'Comparable Company Analysis’?

A comparable company analysis is the term used to refer to valuating your business by comparing your metrics to the metrics of other, similar companies. By ‘similar,’ we mean of a similar size and in the same industry as yours. CCA makes the assumption that similar businesses will have similar multiples of valuation also, i.e. EV/EBITDA. To carry out the process, a group of analysts will gather data in the form of statistics for each company under review, and work out the valuation multiples so that they can be compared.

Comparable Company Analysis is generally one of the first things every banker is taught. Generating a CCA is generally a straightforward process, but a very valuable one in that the information that is provided in the report will be used to estimate the stock price or company value.

Comparable Company Analysis

The first step in the process of generating a CCA is to establish a group of companies you believe are similar to yours in terms of size, industry, and location. From this, investors will be able to make a relative comparison between your company and your competitors. Using this information, it is easier to work out the enterprise value of the company. This information also facilitates calculation of other ratios you may use to make a comparison between a company and the other companies in its peer group.

Relative vs. Comparable

There are lots of ways to value a business. The most commonly used approaches are focused on cash flows and the relative performance of your business compared to similar companies. Cash-based models, e.g. DCF models, are used to help analysts to work out an intrinsic value that will be based on future cash flows. The value of this is then compared against what the market value actually is. The stock is undervalued if the intrinsic value works out to be higher than the market value, and the stock will be overvalued if the intrinsic value is lower than the market value.

As well as intrinsic valuation, analysts also use the method of confirming cash flow valuation with relative comparisons. These relative comparisons will permit the analyst to work out an industry average or benchmark. In CCA’s, the most commonly used valuation measures are price to earnings, enterprise value to sales, price to sales, and price to book. The company will be overvalued if the business’ valuation ratio works out higher than the peer average. The company will be undervalued if valuation ratio works out as lower than the peer average. When used at the same time, relative and intrinsic valuation models provide an estimation of valuation that will be able to be used to aid analysts in gaging the true company value.

Valuation and Transaction Metrics in CCA

Comparables can also be based on transaction multiples. Transactions refer to acquisitions that have recently taken place in your industry. Rather than comparing the stock, the analysts compare multiples based on purchase price of the acquired company. If in a particular industry, all business’ are selling for roughly 1.5 times the market value, it provides the analyst with a method of using the same number to calculate the value of a peer company using these benchmarks.

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How to Carry Out a Comparable Company Analysis

Deeper look into Comparable Comps

A Tutorial

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