Comparable companies analysis

Comparable companies analysis, which everyone shortens to trading comps or just comps, values a company by looking at what the stock market pays for similar companies. If listed businesses that look like the target trade at seven times their EBITDA, the reasoning goes, the target is worth about seven times its own. The result is a market benchmark: a way to value a private company that has no share price, or to judge whether a public company’s price is in line with its peers on a given day[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.].

The premise

The method rests on one assumption: similar companies are a relevant reference point because they share business and financial characteristics, performance drivers and risks[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. The whole craft is in making that assumption true, by choosing the right peers and comparing them on the right numbers. A valuation textbook puts the same thought more sceptically: comparing a firm to how similar firms are priced is the common approach to using multiples, and because truly comparable firms are hard to find, the analyst usually ends up having to control, explicitly or by judgement, for differences in growth, risk and cash flow[2Source 2Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd ed. (Wiley, 2012), ch. 2, “Using Comparables”, and ch. 18, the conclusion.].

The steps

One standard text breaks the work into five steps: select the universe of comparable companies; locate the financial information; spread the key statistics, ratios and trading multiples; benchmark the companies against one another and the target; and determine the valuation[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.].

Selecting the universe means finding the listed companies closest to the target in what they sell, whom they sell to and how they are financed; the first pass is broad and later narrowed. Spreading means laying out each company’s numbers on a standard sheet, which needs a few techniques of its own: last-twelve-months (LTM) figures built from the latest four quarters, calendarisation to line up companies with different fiscal years, and adjustments to strip out non-recurring items so that one company’s bad quarter does not distort its multiple[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. Benchmarking then compares the companies on size, growth, margins and leverage, to see where the target ranks and which peers are its closest comparables, and it may reveal outliers to drop or a need to tier the group[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.].

The multiples

A trading multiple is a measure of value divided by a financial statistic. The most used are enterprise value to EBITDA (EV/EBITDA) and price to earnings (P/E), with EV/EBIT and EV/sales beside them[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. P/E is the one the public knows, but bankers lean on the enterprise value multiples because they are independent of capital structure and of differences in tax and accounting that have nothing to do with operations[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. The rule for pairing is simple: enterprise valueEnterprise value and equity valueEquity value is what the shares are worth; enterprise value is what the whole business is worth to all who fund it. How they link, and why cash is subtracted.Terms and methods · revised 28 September 2026 · 921 words · 4 sources · 5 min goes over the statistics that belong to lenders and shareholders together, such as sales, EBITDAEBITDAEBITDA is earnings before interest, taxes, depreciation and amortization: how it is calculated, why bankers compare firms with it, and why it is not cash flow.Terms and methods · revised 28 September 2026 · 1,060 words · 4 sources · 5 min and EBIT; equity value goes over what belongs to shareholders alone, such as net income[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.].

The multiples can be computed on last-twelve-months numbers or on forecasts for the next year or two, and a leading valuation text argues firmly for the forecasts. Forward multiples vary far less across peers than backward-looking ones, and they embed what matters, which is expected future performance; in the text’s example, the twenty largest pharmaceutical companies in 2019 traded at anywhere from about 10 to more than 70 times last year’s operating income, but all but one at about 7 to 12 times the operating income expected four years out[3Source 3Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies, 7th ed. (Wiley, 2020), ch. 18, “Using Multiples”: the five principles, forward multiples, and “Use the Right Peer Group”.]. The same text’s five principles for multiples are: value a company with several businesses as the sum of its parts; use forward earnings; use enterprise value over EBITA or after-tax operating income rather than P/E, which capital structure distorts; adjust for non-operating items; and use a peer group with similar growth and return on capital, not a broad industry average[3Source 3Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies, 7th ed. (Wiley, 2020), ch. 18, “Using Multiples”: the five principles, forward multiples, and “Use the Right Peer Group”.].

Turning multiples into a value

The last step is judgement. The banker starts from the mean and median of the most relevant multiple, uses the highest and lowest in the group as a ceiling and floor, and then leans on the two or three closest comparables to set a tighter range[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. In the textbook’s illustration the peer group trades between 5.5 and 8.5 times forward EBITDA, with a mean of 7.0 and a median of 6.8, but the three closest comparables sit at 6.5, 7.0 and 7.5, so the selected range is 6.5 to 7.5 times[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. Multiplying the target’s EBITDA by each end of that range gives an implied enterprise value range; subtracting net debt gives the implied equity value; and dividing by the shares gives a price per share[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. The text’s own description is that the process is as much “art” as “science”, and that senior colleagues are consulted on the final call[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.].

Reference point	Multiple
Lowest in the peer group	5.5x
Median of the peer group	6.8x
Mean of the peer group	7.0x
Highest in the peer group	8.5x
Closest comparable A	6.5x
Closest comparable B	7.0x
Closest comparable C	7.5x
= Selected range	6.5x to 7.5x

Source: The illustration in the standard textbook cited below, restated.

The valuation text adds a rule about the peer group that changes the arithmetic. Do not average the whole industry. Its example is nine oilfield equipment companies whose multiples run from about 10 to 17 times; they sort into three tiers, and each tier lines up with its members’ return on capital and growth. A company at 12 times is not cheap if the two peers with its returns and growth also trade at 12; the right comparison is the average of those two, not of all nine[3Source 3Tim Koller, Marc Goedhart and David Wessels, Valuation: Measuring and Managing the Value of Companies, 7th ed. (Wiley, 2020), ch. 18, “Using Multiples”: the five principles, forward multiples, and “Use the Right Peer Group”.].

What it is and is not

Comps measure current valuation, as the market sees it on the day, and that is both the point and the limit. It is often more relevant than an intrinsic method like the discounted cash flowDiscounted cash flow analysisA discounted cash flow analysis values a business as the present value of the cash it should produce: the five steps, the discount rate and the terminal value.Terms and methods · revised 28 September 2026 · 1,128 words · 4 sources · 5 min, because it is what buyers are actually paying; but markets have periods of irrational sentiment that push the whole group too high or too low, and no two companies are the same, so a value borrowed from the peers may miss what makes the target different[1Source 1Joshua Rosenbaum and Joshua Pearl, Investment Banking: Valuation, LBOs, M&A, and IPOs, 3rd ed. (Wiley, 2020), ch. 1: the method and its steps, pp. 13–16; the multiples, pp. 47–48; benchmarking and determining valuation, pp. 50–52.]. The valuation textbook’s conclusion is the bridge back to fundamentals: multiples are determined by the same things that determine a DCF, expected growth, risk and cash flow, and a comparison that fails to control for differences in them will mislead[2Source 2Aswath Damodaran, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd ed. (Wiley, 2012), ch. 2, “Using Comparables”, and ch. 18, the conclusion.]. In a pitch, comps sit beside the DCF and the precedent transactions on one summary page, which the trade calls a football field, and building that page is much of what an investment banking analyst learns first.

@misc{xlsxdev-2026-comparable-companies-analysis,
  author       = {{xlsx.dev}},
  title        = {{Comparable companies analysis}},
  howpublished = {xlsx.dev Wiki},
  year         = {2026},
  month        = sep,
  url          = {https://xlsx.dev/wiki/comparable-companies-analysis}
}