The principle behind trading comparables is that similar businesses can be used as a market benchmark to establish a valuation range for a corporation. The comparables share key markets, growth prospects, operational drivers and risks.
The steps involved in performing trading comparables analysis are:
- Choose comparable companies.
Companies in the peer group should be as similar to the valued company as possible.
- Calculate equity and enterprise values
- Calculate value drivers
An appropriate value driver should be used in order to best understand the business and its valuation. The most common are revenues, EBIT, EBITDA and EPS (Net Income / # of shares)
- Calculate mutliples statistics.
Common market multiples include the following: enterprise-value-to-sales (EV/S), enterprise multiple, P/E ratio (price-to-earnings, price per share to earnings per share) and others.
- Interpret the output and select a valuation range.
There are no hard and fast rules about how to interpret the output of the trading comparables analysis. Experience is significant but in all cases the better the weight of evidence the better the valuation.
Trading comparable companies analysis provides a current valuation based on the market situation. As a consequence, it may be more relevant than intrinsic tools such as DCF. However, traded prices can be subject to periods of extreme volatility which affects the valuation. No two businesses are exactly the same so the degree of comparability of the peers is always subjective.