Comparable Company Analysis Examples Template

Comparable Company Analysis

Comparable comps are nothing but identifying doing relative valuations like an expert to find the firm’s fair value. The comparable comp process starts with identifying the comparable companies, then selecting the right valuation tools, and finally preparing a table that can provide easy inferences about the fair valuation of the industry and the company. It is Part 2 of the equity valuation series articles.

To fully understand these concepts, you should know about Relative Valuation Multiples like EV/EBITDAEV/EBITDAEV to EBITDA is the ratio between enterprise value and earnings before interest, taxes, depreciation, and amortization that helps the investor in the valuation of the company at a very subtle level by allowing the investor to compare a specific company to the peer company in the industry as a whole, or other comparative industries.read more, PE RatioPE RatioThe price to earnings (PE) ratio measures the relative value of the corporate stocks, i.e., whether it is undervalued or overvalued. It is calculated as the proportion of the current price per share to the earnings per share. read more, Price to Book valuePrice To Book ValuePrice to Book Value Ratio or P/B Ratio helps to identify stock opportunities in Financial companies, especially banks, and is used with other valuation tools like PE Ratio, PCF, EV/EBITDA. Price to Book Value Ratio = Price Per Share / Book Value Per Share read more, PEG RatioPEG RatioThe PEG ratio compares the P/E ratio of a company to its expected rate of growth. A PEG ratio of 1.0 or lower, on average, indicates that a stock is undervalued. A PEG ratio greater than 1.0 indicates that a stock is overvalued.read more, etc. However, If you want a quick refresher, you may refer to Part 1 of this equity valuation series that covered the topic of Relative Valuation multiples.

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What is Comparable Company Analysis?

(also called as “Trading Comps”, “Comparable Comps”)

Comparable analysis or Trading comps can be best explained with the help of an example – let’s assume that you are planning to buy a house in New York (why not?). You may search on the many real estate brokerage websites and would also draw a comparative study on the same. You would compare one apartment with another and try to get a sense of what they are worth compared to each other.

When comparing apartments, you would consider different attributes such as the number of rooms, size of bedrooms, number of bathrooms, layout, etc. In doing so, you would notice that apartments with similar kinds of attributes may cost similarly!

Let us now try and understand what a comparable “Company” analysis is? Or Comparable comps. Below is the definition sourced from Investopedia.

source -WSM

From the above apartment related discussion and Investopedia definition, we can draw the following inferences regarding comparable analysis –

Like comparing the apartments, comparable company analysis helps you compare different companies with similar sizes and industries and derive a fair value for them.Instead of looking at the number of beds, location, bathrooms, etc., you look at relative valuation multiples (EV/EBITDA, PE, P/BV, etc.).You infer from a comparison that a company’s price is overvalued or undervalued.

With this basic analogy, we should be able to proceed and move forward to reading the comparable company analysis.

How to read a Comparable company analysis table?

For learning to read a comparative company analysis table or Comparable Comps, I will take a real-life example, Box Inc, which had earlier announced its IPO. We want to understand at what valuation price point we should invest in Box Inc IPO shares.

Below is the comparable company analysis table for Box IPOBox IPOThe analysis of the Box IPO valuation can be done using various methodologies which are Relative Valuation – SaaS Comparable Comps, Comparable Acquisition Analysis, Using Stock-Based Rewards, Valuation cues from Private Equity Funding, Valuation cues from Dropbox Private Equity Funding, and Discounted Cash Flow Approach for Box IPO Valuation.read more. There are broadly 5 parts to the trading comps table –

Company Information –
This includes Company Name, Ticker, and Price. The ticker is a unique symbolTicker Is A Unique SymbolTicker Symbol is the use of letters to represent shares that are traded on the stock market. It is mainly a combination of two or three alphabets that is unique and easy for investors to identify and buy/sell that particular stock.read more given to the company to identify publicly listed companies.
You may take Bloomberg, Reuter’s tickers as well. Also, note that the prices that we take here are the most recent prices.
We make the table so that these prices are linked to the database, where they would get updated automatically.
Size of the company –
This includes Market Capitalization and Enterprise Value.
We normally sort the table based on Market Capitalization. Market CapitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more also provides us pseudo for the size of the company.
Enterprise ValueEnterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more is the current Market-based valuation of the firm.
We may not want to compare a small market capitalization company with a large one.
Valuation Multiples –
It should include 2 to 3 appropriate valuation tools for comparison
We should ideally show one year of historical multiple and two years of forwarding multiples (estimated)
Choosing an appropriate valuation tool is the key to successfully valuing the company.
Operating Metrics –
It may include fundamental ratios like Revenue, growth, ROE, etc
It is important to understand the fundamentals of the company at once.
To make this comp more meaningful, you may include Profit MarginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more, ROE, Net Margin, Leverage, etc.
Summary –
It is a simple mean, median, low, and high of the above metrics
Mean, and Median provides core insights to the fair valuation
If a company’s multiple is above the mean/median, we tend to infer that the company may be overvalued
Likewise, if the multiple is below the mean/median, we may infer that it is undervalued.
High and Low also help us understand the outliers and a case to remove those if they are too far away from the Mean/Median.

Reading the Trading Comp / Comparable Company Analysis – Box IPO

Let us now look at the summary of the Comparable Company analysis of Box IPO.

This includes Company Name, Ticker, and Price. The ticker is a unique symbolTicker Is A Unique SymbolTicker Symbol is the use of letters to represent shares that are traded on the stock market. It is mainly a combination of two or three alphabets that is unique and easy for investors to identify and buy/sell that particular stock.read more given to the company to identify publicly listed companies.
You may take Bloomberg, Reuter’s tickers as well. Also, note that the prices that we take here are the most recent prices.
We make the table so that these prices are linked to the database, where they would get updated automatically.
This includes Market Capitalization and Enterprise Value.
We normally sort the table based on Market Capitalization. Market CapitalizationMarket CapitalizationMarket capitalization is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share.read more also provides us pseudo for the size of the company.
Enterprise ValueEnterprise ValueEnterprise value (EV) is the corporate valuation of a company, determined by using market capitalization and total debt.read more is the current Market-based valuation of the firm.
We may not want to compare a small market capitalization company with a large one.
It should include 2 to 3 appropriate valuation tools for comparison
We should ideally show one year of historical multiple and two years of forwarding multiples (estimated)
Choosing an appropriate valuation tool is the key to successfully valuing the company.
It may include fundamental ratios like Revenue, growth, ROE, etc
It is important to understand the fundamentals of the company at once.
To make this comp more meaningful, you may include Profit MarginsProfit MarginsProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. read more, ROE, Net Margin, Leverage, etc.
It is a simple mean, median, low, and high of the above metrics
Mean, and Median provides core insights to the fair valuation
If a company’s multiple is above the mean/median, we tend to infer that the company may be overvalued
Likewise, if the multiple is below the mean/median, we may infer that it is undervalued.
High and Low also help us understand the outliers and a case to remove those if they are too far away from the Mean/Median.

We can infer the following from the above table –

Cloud companies are trading at an average of 9.5x EV/Sales Multiple.We note companies like Xero are an outlier that trades at 44x EV/Sales multiple (expected 2014 growth rate of 94%).THE lowest EV/Sales multiple is 2.0xCloud companies trade at EV/EBITDA multiple of 32x.

Box Valuation

From the financial model of Box, we note that Box is EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more Negative, so we can’t proceed with EV/EBITDA as a valuation tool. The only multiple that is suitable for valuation is EV/Sales. Since the median EV/Sales is around 7.7x, and the mean is around 9.5x, we may consider making three scenarios for valuations.Optimistic case of 10.0x EV/Sales, Base Case of 7.1x EV/Sales, and Pessimistic Case of 5.0x EV/Sales.

The below table shows the per-share price using the three scenarios.

Box Inc valuation range from $15.65 (pessimistic case) to $29.38 (optimistic case)The most expected valuation for Box Inc using Relative Valuation is $21.40 (expected)

How to Identify Comparable Companies

Comparable analysis’s most important element is identifying the right set of comparables. Comparing the value of apples to oranges does not make any sense here. It is important to conduct a preliminary study on comparable companies, and it generally involves these three steps –

Try to zero down the industries in which the companies are classified.It can be tedious as different sources would give different industries for the same company, and also, the industry names would be different in various sources.Generally, the classifications available are very broad and cannot be relied on completely.If there is no surety about the industry classification (which is the case most of the time), try to identify some keywords relevant to the business descriptions of the companies. E.g., For a Building materials company, the relevant keywords can be – roofing, plumbing, framing, insulation, tiling, construction service, etc.Though this example is simple, for applying the same in real-life scenarios, one needs to establish the value and the value driver and make several adjustments.
It is important to understand the business to select comparable companies.Try to find out the detailed business description of the company.Possible sources for this in the order of preference would be:
Company Website
Research reports
Company Filings (Latest 10K, Annual ReportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, etc.)
Yahoo Finance
Note: Company websites are very useful in helping to visualize all the products and services, but research reports and company filings provide actual segment data to give a true business mix of the company.
Comparable companies can be identified from the following sources in the order of preference:Research ReportsCompany Filings – Competition SectionYahoo Finance – Competitors and Industry sectionsHoovers – Competitors and Industry sections

Professional Comparable Company Analysis: a Step-by-Step approach

The key to preparing the comparable company analysis or Trading comp is to arrive at the right multiple (EV/Sales, P/E, etc.). Below is a sample summary Comparable comp analysis excel sheet –

Company Website
Research reports
Company Filings (Latest 10K, Annual ReportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, etc.)
Yahoo Finance

Preparing the comparable comp table is not difficult; however, correctly calculating the requisite valuation multiple. The requisite output of Company 1, Company 2, and Company 3 is linked from the input tabs “company 1”, “company 2”, and “company 3,” respectively. Hence, we will focus on correctly calculating these multiples with an in-depth example.

You can download the comparable comp excel template from here – Comparable Company Template.

Key Formulas used:

Basic Equity Value = Common Shares Outstanding * Share Price.Diluted Equity Value = Diluted Shares Outstanding * Share PriceDilution from Options = Options – ( Options * Exercise Price) / Share PriceDilution from Convertibles = Convertible Bonds * Conversion RatioEnterprise Value = Equity Value – Cash + Debt + Minority Interest + Preferred StockPreferred StockA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read moreThe exercise price or conversion price needs to be below the share price for the dilution calculations above.

If the conversion price or the exercise price is above the Share Price, there will be no dilution, options will not get exercised, and the conversion of bonds will not occur.

Comparables Company valuation Steps:

Input basic informationInput Balance SheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more informationCalculate “in the money” stock optionsStock OptionsStock options are derivative instruments that give the holder the right to buy or sell any stock at a predetermined price regardless of the prevailing market prices. It typically consists of four components: the strike price, the expiry date, the lot size, and the share premium.read moreCalculate “in the money” convertible securitiesConvertible SecuritiesConvertible securities are securities or investments (preferred stocks or convertible bonds) that can be easily converted into a different form, such as shares of an entity’s common stock, and are typically issued by entities to raise money. In most cases, the entity has complete control over when the conversion occurs.read more and find the diluted EPSCalculate the LTM numbers (ex non-recurring items)Calculate the Equity ValueCalculate The Equity ValueEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding.read more and Enterprise ValueCalculate the respective multiples

Let us now proceed step-by-step to understand this fully. I have taken an example of Robert Half International (Ticker – RHI), and even though the data used here is pretty old (2006 10K and 10Q), I am sure it will still prove to be useful for understanding the general methodology.

Also, look at the Treasury Stock MethodTreasury Stock MethodTreasury Stock Method is an accounting approach assuming that the options & stock warrants are exercised at the beginning of the year (or date of issue, if later) & proceeds from the exercise of these options & warrants are used to repurchase shares in the market. read more and Restricted Stock UnitsRestricted Stock UnitsRestricted Stock Units or RSU can be defined as stock-based compensation that is issued as company’s stock to an employee. The company establishes vesting requirements based on the performance of an individual and the length of the employment.read more.

As with options, you only get dilution from convertible bonds if the company’s current share price exceeds the bonds’ conversion price.

How You Factor Convertible Bonds Into Enterprise Value: If the convertible bonds are in the money (they can convert to shares), you calculate the dilution and add them to the shares outstanding. If they’re out‐of-the‐money (they cannot convert into shares), you count the bonds as debt instead.

Dilution from Convertibles = Convertible Bonds * Conversion RatioConvertible Bonds = Convertible Dollar Amount / Par ValueConversion Ratio = Par Value / Conversion PriceConversion Price = Par Value / Conversion Ratio

Step 5: Calculate the LTM numbers (ex non-recurring items)

(If you are wondering what are non-recurring items, then do have a look at the detailed post on non-recurring itemsNon-recurring ItemsNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.read more)

Important adjustments in Comparable Company Analysis

You can also look at SOTP Valuation and DCF or Discounted Cash FlowDCF Or Discounted Cash FlowDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company’s future performance.read more approach to enhance your knowledge in valuations.

What’s Next?

If you learned something new from this post, please comment below. Let me know what you think. Thanks and take care.

Comparable Company Analysis Examples Template