TRADING COMPS MODELING EXAM WALL
STREET PREP Q and A
1. What to do when companies are in different stages in their life
cyucle:
Mul- tiples like pEG standardize against different long-term growth rates
Ev/revenue facilitate comparisons for early stage companies generating loses.
2. PE ratio defn and description:
share price/EPS Equity Value/ Net income
EPS is used as a proxy for economic equity value
1.Why we use trading comps to value companies:
The purpose of a trading comps analysis is to determine what is the
"appropriate" value of a
company, based on the market values of operationally similar companies.
1/
17
,When you try to gauge the fair value of your house by comparing to the values of
houses
nearby, you're doing a comps analysis.
2. How are comps analyzed?:
We don't compare absolute values but rather multi- ples to account for differences
in a company.
3. Non-operational differences that shuld be taqken into account so as
to not distort the comparison:
• Financial leverage differences
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
• Other accounting differences (lease classification, LIFO vs. FIFO)
• Business life cycle differences
4. What are examples of measures independent of leverage1:
EV, Revenue, EBITDA, EBIT, Unlevered free cash flow
5. Nonrecurring items in historical profits:
must be taken out of profits in order to exclude the distortion
6. Issues with P/E:
2/
17
, EPS is a measure of accounting profit only during a particular period
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
Also, high PE valuation relative to peers could be justified when high PE firm has
higher growth prospects
3/
17
STREET PREP Q and A
1. What to do when companies are in different stages in their life
cyucle:
Mul- tiples like pEG standardize against different long-term growth rates
Ev/revenue facilitate comparisons for early stage companies generating loses.
2. PE ratio defn and description:
share price/EPS Equity Value/ Net income
EPS is used as a proxy for economic equity value
1.Why we use trading comps to value companies:
The purpose of a trading comps analysis is to determine what is the
"appropriate" value of a
company, based on the market values of operationally similar companies.
1/
17
,When you try to gauge the fair value of your house by comparing to the values of
houses
nearby, you're doing a comps analysis.
2. How are comps analyzed?:
We don't compare absolute values but rather multi- ples to account for differences
in a company.
3. Non-operational differences that shuld be taqken into account so as
to not distort the comparison:
• Financial leverage differences
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
• Other accounting differences (lease classification, LIFO vs. FIFO)
• Business life cycle differences
4. What are examples of measures independent of leverage1:
EV, Revenue, EBITDA, EBIT, Unlevered free cash flow
5. Nonrecurring items in historical profits:
must be taken out of profits in order to exclude the distortion
6. Issues with P/E:
2/
17
, EPS is a measure of accounting profit only during a particular period
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
Also, high PE valuation relative to peers could be justified when high PE firm has
higher growth prospects
3/
17