COMPARABLE ANALYSIS

• Comparable company analysis is the process of comparing companies based on similar metrics
to determine their enterprise value.

• A company's valuation ratio determines whether it is overvalued or undervalued. If the ratio is

high, then it is overvalued. If it is low, then the company is undervalued.

• The most common valuation measures used in comparable company analysis are enterprise
value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S).

BENEFITS IN UTILIZING COMPARABLE COMPANY ANALYSIS

• CCA is an easy-to-use and cost-effective method of valuation, as it provides a quick snapshot of a
company's value relative to its peers.

• CCA provides a comprehensive analysis of the company's financial performance, including its
revenue growth, profit margins, and return on investment. This information can be used to
identify areas where the company is performing well or where it needs improvement.

• CCA provides a benchmark for the company's valuation, which can be used to compare it with
other companies in the same industry or sector.

• CCA can help investors to identify potential acquisition targets or investment opportunities, as it
highlights companies that are undervalued relative to their peers.

Relative Valuation Model – a business valuation method that compares a company's value to that of
its competitors or industry peers to assess the firm's financial worth.

- used to value companies by comparing them to other businesses based on certain metrics such as
financial ratios (e.g. P/E ratio). The logic is that if similar companies are worth 10x earnings, then the
company that’s being valued should also be worth 10x its earnings.

FINANCIAL RATIOS - LIQUIDITY, PROFITABILITY, ASSET MANAGEMENT RATIO, SOLVENCY RATIO,

MARKET VALUE RATIO

MARKET VALUE RATIO - financial metrics that measure and analyze stock prices and compare market
prices with those of competitors and against other facts and figures. These ratios track the financial
performance of public companies to understand their position in the market.

- This approach is based on the premise that the value of any asset can be estimated by analyzing how
the market prices ‘similar’ or ‘comparable’ assets. The basic belief here is that it is impossible or
extremely difficult to estimate the intrinsic value of an asset, and therefore, the value of an asset is
whatever the market is willing to pay for it.

Advantages of Relative Valuation

a. Relative valuation is much more likely to reflect market perceptions and moods than DCF valuation.

-It is more updated and it considers the factors affecting the volatility of market prices

b. Relative valuation generally requires less information than DCF valuation.

Disadvantage of Relative Valuation

Relative valuation may require less information in the way in which most analysts and portfolio
managers use it. However, this is because implicit assumptions are made about other variables that
would have been required in a DCF valuation. To the extent that these implicit assumptions are wrong
the relative valuation will also be wrong.

When to use Relative Valuation?

Relative Valuation is easy to use under the following circumstances:

a. There are a large number of assets comparable to the one being valued.

b. These assets are priced in a market.

c. There exists some common variable that can be used to standardize the price.

Steps in Relative Valuation

The following steps have to be followed in carrying out relative valuation:

a. Identify comparable assets and obtain market values for these assets.

b. Convert these market values into standardized values, since the absolute prices cannot be
compared. This process of standardizing creates price multiples.

c. Compare the standardized value or multiple for the asset being analyzed with the standardized
values for comparable asset, adjusting for any differences between the firms that might affect the
multiple, to judge whether the asset is under or overvalued

Multiples

Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of
another, in order to make different companies more comparable. Multiples are the proportion of one
financial metric (i.e. Share Price) to another financial metric (i.e. Earnings per Share). It is an easy way
to compute a company’s value and compare it with other businesses.

There are two main types of multiples. Let us examine them.

1. Equity Multiples

Investment decisions make use of equity multiples especially when an investor aspires for minority
positions in companies. The list below shows some common equity multiples used in valuation

analyses.

• Price/Earnings (P/E) Ratio – the most commonly used equity multiple; needed data is easily
accessible; computed as the proportion of Share Price to Earnings Per Share (EPS).
It is a useful indicato of the investor’s perception about the firm’s future prospects. A firm’s P/E ratio
depends primarily on two factors: the future growth in earnings and the risk directly associated with
the expected earnings. It is used to determine whether the firm’s stock is overpriced or under-priced.
P/E Ratio Formula and Calculation

The formula and calculation are as follows:

P/E Ratio = Market value per share
Earnings per share

EPS = Net income after interest and taxes - Preferred stock dividend requirement
Common Stock Outstanding

• Price/Book (P/B) Ratio – useful if assets primarily drive earnings; computed as the proportion of
Share Price to Book Value Per Share

P/E Ratio = Market value per share

Book Value per share

Book Value per share = Total SHE - Preferred Stock__

Common Stock Outstanding

• Dividend Yield – used for comparisons between cash returns and investment types;
It shows the rate of return of the stockholders using the market price per share. It is computed as the
proportion of Dividend Per Share to Share Price

Dividend Yield = __Dividend per share__

Market Value per share

• Price/Sales (P/S) Ratio – used for firms that make losses; used for quick estimates; calculated by taking
a company's market capitalization (the number of outstanding shares multiplied by the share price) and
divide it by the company's total sales or revenue over the past 12 months.

Price/Sales (P/S) Ratio = Market Value of Common Stock

Total Revenue / Total Sales

2. Enterprise Value (EV) Multiples

When decisions are about mergers and acquisitions, enterprise value multiples are the appropriate
multiples to use.
Enterprise Value (EV) – a measure of a company's total value, often used as a more comprehensive
alternative to equity market capitalization. EV includes in its calculation the market capitalization of a
company but also short-term and long-term debt as well as any cash on the company's balance sheet.

Enterprise value is a popular metric used to value a company for a potential takeover.

Formula for calculation of EV:

EV = MC + Total Debt – C

Where:
MC = Market capitalization; equal to the current stock price multiplied by the number of outstanding
stock shares
Total debt = Equal to the sum of short-term and long-term debt
C = Cash and cash equivalents; the liquid assets of a company, but may not include marketable
securities

The list below shows some common enterprise value multiples used in valuation analyses.

• EV/Revenue – slightly affected by differences in accounting; computed as the proportion of Enterprise

Value to Sales or Revenue.

• EV/EBITDA – EBITDA can be used as a substitute of free cash flows (FCF); most used
enterprise value multiple; computed as the proportion of Enterprise Value to Enterprise Value / Earnings
before Interest, Tax, Depreciation & Amortization

• EV/Invested Capital – used for capital-intensive industries; computed as the proportion of

Enterprise Value to Invested Capital