What is Comparable Company Analysis?

//What is Comparable Company Analysis?
What is Comparable Company Analysis? 2017-10-01T07:52:35+00:00

Definition: Comparable company analysis (CCA) is to the process of examining and comparing companies that operate in the same sector using valuation multiples.

What Does Comparable Analysis Mean?

What is the definition of comparable analysis? CCA holds that companies that operate in the same industry share similar valuation multiples, and therefore, their comparison is easier. Financial analysts use comparable company analysis for a group of peer companies based on several criteria, including their size, growth potential or earnings potential.

The main advantage of comparable company analysis is that it makes it easier to determine a benchmark value based on the multiples used in the firm valuation, thereby providing an effective tool to compare and assess the fundamental characteristics of similar firms. On the downside, CCA may not provide accurate results when there are a few comparable companies.

Let’s look at an example.

Example

Markus is a financial analyst. He is asked to perform a comparable company analysis of six manufacturing companies. Markus creates an Excel spreadsheet, and he uses the following inputs to calculate the following multiples:

Comparable Company Analysis Example

Multiples

Comparable Company Analysis Meaning

Markus finds that the six companies have an average:

EV/Sales 3.98, and companies C, E and F are above average, whereas companies A, B, and D are below average.

EV/EBITDA 6.17, and companies C, D, and F are above average, whereas companies A, B, and E are below average.

P/E 6.01, and companies C, D, and F are above average, whereas companies A, B, and E are below average.

P/BV 2.04 and companies D and F are above average, whereas companies A, B, C, and E are below average,

P/CF 3.68 and companies C, D, and F are above average, whereas companies A, B, and E are below average.

He has also calculated the minimum and the maximum values for each multiple to determine, which companies have the highest values, and which companies have the lowest values and why.

Summary Definition

Define Comparables Analysis: CCA means studying two companies in the same industry by cross referencing their performance metrics.