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Comparables Approach

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The comparable model is a relative valuation approach.

2 main comparable valuation methods are:

Trading Comps: The first primary comparable approach is the most common and looks at market comparables for a firm and its peers: in the same industry and similar size companies.

Transaction Comps: The second comparable approach looks at market transactions where similar firms or divisions have been bought out or acquired by other rivals, private equity firms, or other classes of large, deep-pocketed investors.

It is important to note that it can be difficult to find truly comparable companies and transactions to value equity. This is the most challenging part of a comparables analysis.

Additionally, using trailing and forward multiples can make a big difference in analysis. If a firm is growing rapidly, a historical valuation will not be overly accurate. What matters most in valuation is making a reasonable estimate of future market multiples. If profits are projected to grow faster than rivals, the value should be higher.

The stock market can become overvalued at times, which would make a comparable approach less meaningful, especially if comps are overvalued. For this reason, using all different valuation approaches is the best idea.

Valuation is as much an art as it is a science. Instead of obsessing over what the true dollar figure of equity might be, it is most valuable to come down to a valuation range.

How to Learn Financial Modeling

Master financial modeling with hands-on training. Financial modeling is a technique for predicting the financial performance of a business or other type of institution over time using real-world data.

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