TRADING COMPS MODELING WALL
STREET UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS EXAM SCRIPT
●● Comps are analyzed using multiples
Answer: Companies are trickier to value than houses bc finding truly
comparable companies is difficult
Even if you find comparable businesses operationally, you need to
standardize for various factors, most notably size differences
Bc of the need to account for this difference, we don't compare absolute
values but rather multiples (equity/EV are standardized against various
measures of firm's profitability
●● Enterprise value multiples
Answer: EV/EBITDA
EV/Revenue
EV/EBIT
Unlevered so tell the story operationally as a multiple
●● Equity value multiples
Answer: P/E ratio (share price/EPS)
Market cap/net income
P/E to growth (PEG ratio)
,Levered so tell the story operationally and leverage (before interest,
principal)
●● Financial leverage differences
Answer: EV numerator is a measure of value independent of leverage
Revenue, EBITDA, EBIT, and unlevered cash flow denominator provide
a measure of profit independent of leverage
●● Accounting differences (depreciation method, useful life
assumptions)
Answer: Use profit metrics before D&A such as revenue, EBITDA,
unlevered free cash flows
Useful for companies with comparable levels of capital intensity
(otherwise dangerous)
●● Temporary distortions (nonrecurring items)
Answer: When using multiples that use historical profits as denominator,
those profits must be "scrubbed" to exclude distortive one time items
such as restructuring expenses, ligation costs, and one time gains on sale
●● Other accounting differences (lease classification, LIFO v FIFO)
Answer: Must be treated on industry-specific basis
May require adjustments to both numerator and denominator
, ●● Business life cycle differences
Answer: Comparable companies operationally may be at different
phases of their life cycle (early stage v. growth v. maturity v. decline)
Multiples like PEG standardize against different LT growth rates, while
others like EV/Revenue and EV/EBITDA facilitate comparisons for
early-stage companies generating losses
●● P/E ratio
Answer: Share price/EPS
Equity value/Net income
EPS used as a proxy for economic equity value
●● P/E ratio issues
Answer: EPS is a measure of accounting profit only during a particular
period
Accounting profits can be misleading bc they include noncash and
nonrecurring items, and accounting assumptions (such as historical v.
market costing) and can be manipulated
Also high PE valuation relative to peers could be justified when high PE
firm has higher growth prospects
Less relevant for high growth companies
●● P/E ratio most appropriate for...
Answer: Mature lifecycle companies
STREET UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS EXAM SCRIPT
●● Comps are analyzed using multiples
Answer: Companies are trickier to value than houses bc finding truly
comparable companies is difficult
Even if you find comparable businesses operationally, you need to
standardize for various factors, most notably size differences
Bc of the need to account for this difference, we don't compare absolute
values but rather multiples (equity/EV are standardized against various
measures of firm's profitability
●● Enterprise value multiples
Answer: EV/EBITDA
EV/Revenue
EV/EBIT
Unlevered so tell the story operationally as a multiple
●● Equity value multiples
Answer: P/E ratio (share price/EPS)
Market cap/net income
P/E to growth (PEG ratio)
,Levered so tell the story operationally and leverage (before interest,
principal)
●● Financial leverage differences
Answer: EV numerator is a measure of value independent of leverage
Revenue, EBITDA, EBIT, and unlevered cash flow denominator provide
a measure of profit independent of leverage
●● Accounting differences (depreciation method, useful life
assumptions)
Answer: Use profit metrics before D&A such as revenue, EBITDA,
unlevered free cash flows
Useful for companies with comparable levels of capital intensity
(otherwise dangerous)
●● Temporary distortions (nonrecurring items)
Answer: When using multiples that use historical profits as denominator,
those profits must be "scrubbed" to exclude distortive one time items
such as restructuring expenses, ligation costs, and one time gains on sale
●● Other accounting differences (lease classification, LIFO v FIFO)
Answer: Must be treated on industry-specific basis
May require adjustments to both numerator and denominator
, ●● Business life cycle differences
Answer: Comparable companies operationally may be at different
phases of their life cycle (early stage v. growth v. maturity v. decline)
Multiples like PEG standardize against different LT growth rates, while
others like EV/Revenue and EV/EBITDA facilitate comparisons for
early-stage companies generating losses
●● P/E ratio
Answer: Share price/EPS
Equity value/Net income
EPS used as a proxy for economic equity value
●● P/E ratio issues
Answer: EPS is a measure of accounting profit only during a particular
period
Accounting profits can be misleading bc they include noncash and
nonrecurring items, and accounting assumptions (such as historical v.
market costing) and can be manipulated
Also high PE valuation relative to peers could be justified when high PE
firm has higher growth prospects
Less relevant for high growth companies
●● P/E ratio most appropriate for...
Answer: Mature lifecycle companies
