Investment Banking Chapter 1
Comparable Companies Analysis
Applicable for All Quarters (Q1-Q4)
B
Questions answered in the video include?
LU
- Finding the right universe of comparable companies using business and financial
characteristics
- Enterprise and equity value multiples
YC
- Treasury stock and if-converted methods for fully diluted shares
- Net share settlement method (NSS)
D
- Calendarization of financial data
TU
- Adjustments for non-recurring items
- Benchmarking and valuation
ES
Comparable Company Analysis (comparable companies" or "trading comps)
C
Is one of the primary methodologies used for valuing a given focus company, division,
A
business, or collection of assets ("target"). It provides a market benchmark against which
a banker can establish valuation for a private company or analyze the value of a public
company at a given point in time.
,Comparable companies has a broad range of applications, most notably for various
mergers & acquisitions (M&A) situations, initial public offerings (IPOs), restructurings,
and investment decisions.
a process used to evaluate the value of a company using the metrics of other businesses of
B
similar size in the same industry
LU
Multiples
YC
Measures the well-being of a company by comparing two metrics, usually by dividing
one by the other
D
- most common multiple used in the valuation of stocks is the price-to-earnings (P/E)
TU
multiple.
Trading Multiples
ES
used to understand how similar companies are valued by the stock market as a multiple of
Revenue, EBITDA, Earnings Per Share, EBIT, etc. The basic premise of making a
C
comparison is that they assume that the stock markets are efficient.
A
Comparison to other companies for which a public market valuation is available
utilize a measure of value in the numerator and a financial statistic in the denominator.
Trading Multiples Examples
,enterprise value-to-earnings before interest, taxes, depreciation, and amortization
(EV/EBITDA), Price-To-Earnings ratio (P/E), EV/Revenue, Enterprise value before
Interest and Taxes (EV/EBIT).
Why do bankers use Enterprise Value (E/V) instead of Price to Earnings (P/E)
Because they are independent of capital structure and other factors unrelated to business
B
operation (e.g. , differences in tax regimes and certain accounting policies).
LU
What is Comparable Company Analysis designed to do?
Designed to reflect "current" valuation based on prevailing market conditions and
YC
sentiment. As such, in many cases it is more relevant than intrinsic valuation analysis,
such as discounted cash flow analysis
Comparable Companies Analysis Steps
D
1) Select universe of comparable companies
TU
2) Locate the necessary financial information
3) Spread key statistics, ratios, and trading multiples
ES
4) Benchmark the comparable companies
5) Determine valuation
C
Step 1 Select the Universe of Comparable Companies
- The selection of a universe of comparable companies for the target is the foundation for
A
performing trading comps
- As a starting point, the banker typically consults with peers or senior colleagues to see if
a relevant set of comparable companies already exists internally
, - Companies in the same sector (or, preferably, "sub-sector") with similar size tend to
serve as good comparables
Step II. Locate the Necessary Financial Information.
Locate the financial information necessary to analyze the selected comparable companies
B
and calculate ("spread") key financial statistics, ratios, and trading multiples
LU
Step III. Spread key statistics, ratios, and trading multiples
- involves calculating market valuation measures such as enterprise value and equity
YC
value, as well as key income statement items, such as EBITDA and net income
- variety of ratios and other metrics measuring profitability, growth, returns, and credit
D
strength are also calculated at this stage. Selected financial statistics are then used to
TU
calculate trading multiples for the comparables
Step IV. Benchmark the Comparable Companies
ES
- Lay out the calculated financial statistics and ratios for the comparable companies (as
calculated in Step III) alongside those of the target in spreadsheet form for easy
C
comparison. This is known as Benchmarking
Benchmarking
A
a process by which a company compares its performance with that of high-performing
organizations
Comparable Companies Analysis
Applicable for All Quarters (Q1-Q4)
B
Questions answered in the video include?
LU
- Finding the right universe of comparable companies using business and financial
characteristics
- Enterprise and equity value multiples
YC
- Treasury stock and if-converted methods for fully diluted shares
- Net share settlement method (NSS)
D
- Calendarization of financial data
TU
- Adjustments for non-recurring items
- Benchmarking and valuation
ES
Comparable Company Analysis (comparable companies" or "trading comps)
C
Is one of the primary methodologies used for valuing a given focus company, division,
A
business, or collection of assets ("target"). It provides a market benchmark against which
a banker can establish valuation for a private company or analyze the value of a public
company at a given point in time.
,Comparable companies has a broad range of applications, most notably for various
mergers & acquisitions (M&A) situations, initial public offerings (IPOs), restructurings,
and investment decisions.
a process used to evaluate the value of a company using the metrics of other businesses of
B
similar size in the same industry
LU
Multiples
YC
Measures the well-being of a company by comparing two metrics, usually by dividing
one by the other
D
- most common multiple used in the valuation of stocks is the price-to-earnings (P/E)
TU
multiple.
Trading Multiples
ES
used to understand how similar companies are valued by the stock market as a multiple of
Revenue, EBITDA, Earnings Per Share, EBIT, etc. The basic premise of making a
C
comparison is that they assume that the stock markets are efficient.
A
Comparison to other companies for which a public market valuation is available
utilize a measure of value in the numerator and a financial statistic in the denominator.
Trading Multiples Examples
,enterprise value-to-earnings before interest, taxes, depreciation, and amortization
(EV/EBITDA), Price-To-Earnings ratio (P/E), EV/Revenue, Enterprise value before
Interest and Taxes (EV/EBIT).
Why do bankers use Enterprise Value (E/V) instead of Price to Earnings (P/E)
Because they are independent of capital structure and other factors unrelated to business
B
operation (e.g. , differences in tax regimes and certain accounting policies).
LU
What is Comparable Company Analysis designed to do?
Designed to reflect "current" valuation based on prevailing market conditions and
YC
sentiment. As such, in many cases it is more relevant than intrinsic valuation analysis,
such as discounted cash flow analysis
Comparable Companies Analysis Steps
D
1) Select universe of comparable companies
TU
2) Locate the necessary financial information
3) Spread key statistics, ratios, and trading multiples
ES
4) Benchmark the comparable companies
5) Determine valuation
C
Step 1 Select the Universe of Comparable Companies
- The selection of a universe of comparable companies for the target is the foundation for
A
performing trading comps
- As a starting point, the banker typically consults with peers or senior colleagues to see if
a relevant set of comparable companies already exists internally
, - Companies in the same sector (or, preferably, "sub-sector") with similar size tend to
serve as good comparables
Step II. Locate the Necessary Financial Information.
Locate the financial information necessary to analyze the selected comparable companies
B
and calculate ("spread") key financial statistics, ratios, and trading multiples
LU
Step III. Spread key statistics, ratios, and trading multiples
- involves calculating market valuation measures such as enterprise value and equity
YC
value, as well as key income statement items, such as EBITDA and net income
- variety of ratios and other metrics measuring profitability, growth, returns, and credit
D
strength are also calculated at this stage. Selected financial statistics are then used to
TU
calculate trading multiples for the comparables
Step IV. Benchmark the Comparable Companies
ES
- Lay out the calculated financial statistics and ratios for the comparable companies (as
calculated in Step III) alongside those of the target in spreadsheet form for easy
C
comparison. This is known as Benchmarking
Benchmarking
A
a process by which a company compares its performance with that of high-performing
organizations
