Comparable company analysis is a process used to evaluate the standing of a company using the metrics of other businesses of similar sizes in the same or complimenting industries. This process can be highly beneficial and operates under the assumption that similar companies will have similar valuation multiples and financial valuation ratios. The key benefit in doing so enables one to determine whether a company or product line is overvalued or undervalued, which is determined by high and low ratio results. The main measurable values used include enterprise value to sales, price to earnings, price to book, and price to sales statistics.
This process is achieved by compiling a list of available statistics for the companies being reviewed and then calculating these valuation multiples to compare them, the information these reports provide can be used to determine an average estimate of value for the stock price or a company’s overall value.
Spanning the years as far back as the 1800s, this has been classed as the oldest form of comparable analysis used by business minds and statistic specialists alike.
Specifications That Are Considered When Preparing an Analysis Including:
- Company Size
- Growth Rates
- Annual Turnover
- Industry Type.
Useful Benefits Of Conducting A Professional Analysis Include:
- In-depth Industry Knowledge
- Success Predictions
- Fairness
- Pitfall Avoidance
Potential Pitfalls of
As accuracy is king when it comes to analysis work of any kind, it is important to look out for and avoid any pitfalls associated with the work you are doing.
These pitfalls can include:
- Finding true comparable peers.
- Short-term swings in the market.
- May not be entirely useful when there are few or no comparable companies involved.
- Less reliable when comparable companies are thinly traded.
Furthermore, a process called arithmetic mean can also create certain problems if not implemented correctly. This thesis aims to describe, assess, and evaluate the comparable company valuation, which is most commonly used and presents an alternative approach on how to derive the right multiples. However, problems can enter the equation because the value is not substantiated by any value driver from the multiples used; therefore, solely, it cannot explain how the conclusion of this value was derived.
The key question is whether the arithmetic means accurately represents The target company’s true value when affected by influences, including:
- Temporary market conditions or non-fundamental factors.
- An insufficient amount of comparable companies involved in the process.
- Difficulty is finding appropriate comparable companies for various reasons.
- Less reliable when comparable companies are thinly traded.
To avoid such problems, one needs to implement a logical and strategic step by step plan from the beginning of each process through to completion.
Steps Involved in Analyzing Prospective Peers
A merger is classified by combining/ pooling two or more businesses, in oppose to an acquisition which is classified as the purchase of the ownership of one company by another company. Regardless of these facts, there are numerous steps that go into finding and analysing the right kind of peers in order to assure a successful outcome.
Peer Group Selection
As with all successful plans, the selection is always a key factor in ensuring beneficial stats. To select the comparable companies you need, you must understand the target company’s business. Comparable companies will always share a similar industry, business type, and financial characteristics with the target. Sources used to help identify suitable comparable companies include: Annual reports, proxy statements, and analyst research reports.
Data Collecting
Once you have identified the comparable companies, the next step is to collect the necessary information on each one to perform the analysis. This will include:
- The most recent 10-K, 10-Q, and 8-K earnings released.
- Certain financial projections or a recent analyst research report.
- any material events since the last reporting period (including Acquisitions and divestitures, Stock repurchases, debt financings, and legal settlements)
Analyzing the Final Results
To compare different companies effectively, you must understand why their multiples are different. Reasons why one company’s projected stats might be lower than that of a peer, could include slower projected growth, declining margins, or higher risk margins. It is often useful to compare one company’s multiples to those of the peer group, collectively. To do so, one can calculate the high, low, mean, and median summary statistics for the group as a whole.
Check Your Work
Last but not least, you need to check your work. In all analysis work accuracy is everything. If your summaries are off even by one amount it can throw everything out of balance.
Advantages of Comparing Publicly Traded Peers
With comparable analysis, we are assessing a company’s value relative to its publicly traded peers. The main advantage of this method is speed. It is much faster to apply the average peer group’s multiple to your company’s financial metric than it is to forecast each year’s cash flows.
Other benefits include:
Easier calculations using widely available data
Variety can be extremely beneficial when wanting to create a bigger picture. Relative valuation is a method of valuing a firm by comparing standardized valuation metrics with those of similar companies, and it is generally the starting point in peer comparison analysis. And when done correctly it gives your company a lot more data to work with.
Determining a benchmark value
In fluctuating markets and industries, it can be difficult to maintain a clear-cut grasp on leading values and trends. By comparing to publicly trading peers, one can make use of indexes in investment performance measurements, which can represent a change from each index, thereby better gauging market or business sentiment and patterns.
How Investors Interpret These Results
In many industries, the main aim of the game is not only to get a firm handle on your company and its goings on but to attract and utilize beneficial investors. That, in many ways, is the very reason analytics are used in the first place. There are a variety of aspects an investor will look into when considering investing in a company or product, and comparable company analysis is a great way of presenting that needed information.
Investors show interest in different types of assets with an expectation that the asset will increase in a sufficient amount of value to compensate for the risk taken when purchasing the asset in the first place. For this reason, knowledge of how companies create value is essential and can be calculated in the following ways:
Market Capitalization
This represents the total value of a company and does not reflect the management’s allocation of its capital structure among the different forms of the company’s financing. It is a useful representation of valuation for common stock investors because in most cases, they do not purchase a majority-owned stake in the company.
Enterprise Value
Enterprise Values represent the total value of a company and incorporates all of the components of management’s allocation of the capital structure–equity, debt, preferred stock, etc. It is a useful representation of strategic, private and any other ruling factors for equity investors because it represents the takeover value of the company.
Preferred Stock
Investors are always interested in what they can gain in any given transaction, and preferred stocks are a great asset in that way because it is a special tranche of the capital structure that has some debt-like qualities in the sense of turning stock into specific types of shares. If your company’s preferred stocks can outmatch similar companies, you would have a higher chance of closing the deal with beneficial investors.
Debt
The fact is that no one will want to invest in a company that is saturated in debt because of the risk they would be putting on themselves in turn. Because of that fact, a company’s debt history and standing are always very closely analyzed before moving forward. These debt checks usually Include short and long-term debt, as listed on the company’s balance sheet, as well as current portions of long-term debt.
Placing a Winning Hand on the Table – The Power of Analytics
There are many factors that can and do affect your business daily, but this does not need to be a gamble. Through methods like successful comparable company analytics, a business owner can take a step ahead and have control on what takes place within their company, and the best part is that they do not necessarily need to handle these details themselves. There are highly trained and prepared analysts available to assist any company when getting all of their ducks or digits in a row, and at Research Optimus (ROP) we go over and above the norm to ensure every detail is seen to and completed in a timely and accurate fashion.
We have over a decade in analytics experience which shines in each and every one of our successful projects. If you need professional analytics services, do not hesitate to contact our team, and we will assist in taking your company to the next level.
– Research Optimus
