What is a Comparable Company Analysis (CCA)?
A Comparable Company Analysis (CCA) is a relative valuation method that estimates a firm’s value by looking at valuation multiples of similar companies in the same industry. The core idea is that firms with similar business models, growth prospects, risk profiles, and size should trade at similar multiples (for example, enterprise value divided by EBITDA). Analysts use CCA to get a market-based “sanity check” on valuations produced by intrinsic models such as discounted cash flow (DCF).
Key definitions (first use)
– Multiple: a ratio that relates a company’s market value to a measure of operating performance (for example, EV/EBITDA).
– Enterprise value (EV): a measure of total firm value equal to market capitalization + total debt + minority interest + preferred stock − cash and cash equivalents. It represents value attributable to all capital providers.
– EBITDA: earnings before interest, taxes, depreciation, and amortization; used as a proxy for operating cash flow.
– Price-to-earnings (P/E): market capitalization or share price divided by net income or earnings per share (EPS).
How CCA works — step-by-step
1. Define the valuation purpose and time frame (e.g., takeover pricing, fairness opinion, board review).
2. Select a peer group of comparable firms (see criteria below).
3. Collect financial data and compute the relevant metrics for each peer: EV, market cap, EBITDA, revenue, net income, shares outstanding, net debt, and historical/current multiples.
4. Calculate a central tendency for each multiple across the peer set (median is commonly used; mean can be skewed by outliers).
5. Apply the chosen peer multiple(s) to the target company’s corresponding metric (e.g., apply median EV/EBITDA to target EBITDA).
6. Convert implied enterprise value to equity value by subtracting net debt and adjusting for minority interest or preferred stock, then divide by shares outstanding to get an implied per-share value.
7. Cross-check using alternative multiples (P/E, EV/Sales, P/B) and transaction multiples when available.
8. Document assumptions, adjustments, and reasons for inclusion/exclusion of peers.
Setting up a peer group — common selection criteria
– Industry and primary business lines (NAICS/SIC codes can help).
– Comparable size (revenue, market cap).
– Similar growth rates and margin profiles.
– Comparable capital structure and accounting policies.
– Same geography or currency exposure when relevant.
– Recent operating history (avoid businesses in special turnaround situations unless comparable).
Typical multiples used and when to use them
– EV/EBITDA: good for comparing operating performance across firms with different capital structures and tax situations.
– EV/Revenue (EV/Sales): useful when earnings are negative or immature; less sensitive to accounting differences.
– P/E: appropriate when earnings are stable and comparable accounting is used.
– P/B (price-to-book): relevant for capital-intensive firms or financial institutions.
– Transaction multiples: based on actual M&A deal prices; helpful to gauge takeover premiums but reflect deal-specific factors.
Key adjustments and common pitfalls
– Adjust for one-offs, nonrecurring items, and differing fiscal year-ends.
– Reconcile accounting differences (e.g., operating leases capitalized vs expensed).
– Watch for outliers; use medians or trimmed means.
– Consider liquidity and free-float differences that affect market prices.
– Size and growth differentials: a small high-growth company may justify higher multiples than large mature peers.
Worked numeric example (simple, illustrative)
Assumptions:
– Target company EBITDA (last-twelve-months) = $200 million.
– Target net debt = $600 million (total debt − cash).
– Shares outstanding = 50 million.
– Peer-group median EV/EBITDA = 8.0x.
Steps:
1. Implied enterprise value = peer multiple × target EBITDA = 8.0 × $200m = $1,600m.
2. Implied equity value = EV − net debt = $1,600m − $600m = $1,000m.
3. Implied price per share = equity value ÷ shares outstanding = $1,000m ÷ 50m = $20.00 per share.
Notes on the example:
– This ignores minority interests, preferred stock, and other adjustments for simplicity.
– If peer median EV/EBITDA were 6.0× instead, implied price per share would fall to $12.00; if 10.0×, it would rise to $28.00. That shows sensitivity to the chosen multiple.
Comparing CCA to other valuation approaches
– CCA is a market-based relative approach; DCF is an intrinsic, cash-flow-based approach.
– Use CCA to cross-check DCF outputs or to produce market-implied valuations when projections are uncertain.
– Transaction comps reflect actual deals and can imply takeover prices, but they may embed deal-specific synergies or premiums.
Short checklist before you present CCA results
– Have I documented peer
selection criteria (industry, geography, size, growth profile)? – Are my data dates aligned (same fiscal trailing 12 months or LTM, same quarter-end)? – Have I normalized operating metrics for nonrecurring items (restructuring, discontinued ops)? – Did I convert all figures to the same currency and units? – Have I chosen the correct multiples type (enterprise-value multiples like EV/EBITDA when comparing firms with different capital structures; equity multiples like P/E when comparing on net income/per-share basis)? – Have I adjusted EV for net debt, minority interests, preferred stock and dilutive instruments (options, convertibles)? – Did I check for outliers and document why any peer was excluded? – Have I presented a sensitivity table and a range (not just a single implied price)? – Have I clearly cited data sources and the exact dates used?
Common pitfalls and quick checks
– Mixing multiples: Don’t apply an EV multiple to equity value without subtracting net debt and other claims. Check: implied equity value = implied EV − net debt − minority interests − preferred stock − other non-controlling claims.
– Mismatched periods: Use LTM (last twelve months) consistently, or clearly state that you used FY1/FY2 projections and why.
– Ignoring one-offs: Remove or explain items such as litigation settlements, asset sales or large restructuring charges that distort earnings.
– Size and growth mismatch: A small, fast-growing company should not be valued only against large, mature peers without adjustment or justification.
– Currency and accounting standards: Convert currencies at the correct FX rate and note IFRS vs GAAP recognition differences that affect metrics like EBITDA.
– Survivorship and liquidity bias: Public peers with low trading volume can produce unreliable market multiples.
How to present CCA results — minimal deliverable checklist
– Title slide: company, valuation date, purpose (fairness opinion, benchmarking, etc.).
– Peer list with rationale for inclusion/exclusion.
– Source table: where each data point came from (filings, data provider, date).
– Multiple table: multiples for each peer (EV/Revenue, EV/EBITDA, P/E, etc.) and the chosen central tendency (median recommended).
– Reconciliation: steps converting implied EV to implied equity value and per-share price (show all adjustments).
– Sensitivity table: implied share price across a sensible multiple range and different share count assumptions (e.g
…for example, basic shares, fully diluted shares (including in-the-money options and warrants), and diluted shares after assumed option exercises and any known forward issuances).
– Supporting schedules: peer company profiles, reconciliation of non-GAAP adjustments, minority interest and JV treatment, and a reconciled cap table.
– Appendices: raw data downloads (screenshots or export files), detailed peer selection notes, and a sensitivity/Monte Carlo workbook if used.
How to interpret CCA results — practical guidance
– Use central tendency, not a single multiple. The median multiple of peers is robust to outliers; the mean can be skewed by extreme values.
– Produce a valuation range. Convert multiple-based implied enterprise values (EV) into implied equity values and then into a per-share range using your different share-count assumptions.
– Triangulate. Compare the CCA-derived range with results from at least one other method (discounted cash flow, or precedent transactions) and explain material divergences.
– Explain directionality. If your target is at the low end of the peer multiple range, explain whether lower multiples reflect weaker growth, lower margins, higher risk, country or accounting differences, or market illiquidity.
– Quantify sensitivity. Show how implied equity value moves with plausible shifts in multiples and share counts so readers can see the drivers.
Worked numeric example (step-by-step)
Assumptions (TargetCo)
– Last-twelve-month (LTM) revenue: $500 million.
– LTM EBITDA: $80 million.
– Net debt (debt minus cash): $100 million (positive means net debt).
– Basic shares outstanding: 50.0 million.
– Dilutive instruments assumed exercised: 5.0 million.
– Diluted shares for valuation: 55.0 million.
Peer-derived central-tendency multiples (medians)
– EV/Revenue median = 2.0x.
– EV/EBITDA median = 8.0x.
Step 1 — Implied EV from EV/Revenue
– Implied EV = Revenue × EV/Revenue = $500m × 2.0 = $1,000 million.
Step 2 — Implied EV from EV/EBITDA
– Implied EV = EBITDA × EV/EBITDA = $80m × 8.0 = $640 million.
Step 3 — Convert implied EV to implied equity value
– Equity value = EV − Net debt.
– From EV/Revenue: Equity = $1,000m − $100m = $900 million.
– From EV/EBITDA: Equity = $640m − $100m = $540 million.
Step 4 — Per-share implied price (using diluted shares)
– Per-share (Revenue multiple) = $900m / 55.0m = $16.36.
– Per-share (EBITDA multiple) =
– Per-share (EBITDA multiple) = $540m / 55.0m = $9.82
Step 5 — Implied per‑share range and reconciled value
– Implied per‑share range from peers:
– Low (EV/EBITDA): $9.82
– High (EV/Revenue): $16.36
– Simple average (unweighted) = ($9.82 + $16.36) / 2 = $13.09 per share.
– Example weighted average (if you prefer to weight EBITDA more because it better reflects operating performance): weight EV/EBITDA 70%, EV/Revenue 30%:
– Weighted = 0.70×$9.82 + 0.30×$16.36 = $11.78 per share.
Interpretation
– The comparable‑company analysis (CCA) produces an implied per‑share range ($9.82–$16.36) and a reconciled single estimate (here $13.09 unweighted or $11.78 weighted). Use the range to express valuation uncertainty; choose weighting based on which multiples best suit the company’s business model and lifecycle.
Quick sensitivity check (illustrates key drivers)
– If net debt were $200m instead of $100m:
– Equity (Revenue multiple) = $1,000m − $200m = $800m → per‑share = $800 / 55 = $14.55
– Equity (EBITDA multiple) = $640m − $200m = $440m → per‑share = $440 / 55 = $8.00
– Range becomes $8.00–$14.55 (shows how net debt materially shifts equity value).
Practical checklist for performing CCA
1. Define the subject company (date, currency, diluted share count, net debt definition).
2. Select peers — match industry, business mix, geography, scale, and growth profile.
3. Collect financials and calculate consistent metrics (revenue, EBITDA, EPS, capex, etc.).
4. Normalize for one‑offs and accounting differences (nonrecurring items, IFRS vs GAAP, lease capitalization).
5. Compute EV = market cap + net debt + minority interest − investments/cash as appropriate.
6. Calculate multiples (use trailing, forward, or LTM consistently across peers).
7. Use central tendency (median preferred to mean) and trim outliers if necessary.
8. Convert implied EV → equity value using the subject’s net debt and share count at the valuation date.
9. Produce range, mean/median, and a reconciled value with transparent weighting and sensitivity tests.
10. Document assumptions and limitations.
Common pitfalls and adjustments
– Using inappropriate peers (different margins, capital intensity, or growth).
– Failing to normalize for nonrecurring items or accounting differences.
– Mixing trailing and forward multiples without adjustment.
– Applying EV/EBITDA to financials where EBITDA is negative or meaningless (use EV/Revenue or other sector metrics).
– Ignoring off‑balance sheet liabilities, pension deficits, minority interests, or large cash holdings.
– Overreliance on a single multiple; always check multiple types and conduct sensitivity analysis.
When to use which multiple (high level)
– EV/Revenue: useful for early‑stage or negative‑EBITDA companies; less informative about profitability.
– EV/EBITDA: common for stable, capital‑intensive businesses — capital‑structure neutral.
– P/E (price/earnings): equity‑holder view, sensitive to leverage and non‑
‑cash items, one‑offs, and accounting choices. Use P/E when earnings are positive, comparable accounting is reasonably consistent, and you want an equity‑holder perspective.
– P/B (price/book): Useful for asset‑heavy, regulated, or financial firms where balance‑sheet values matter (book value = shareholders’ equity). Less helpful for intangible‑intensive or high‑growth firms.
– EV/EBIT (enterprise value / earnings before interest and taxes): Similar to EV/EBITDA but includes depreciation and amortization; appropriate when capex and D&A materially affect operating profitability.
– EV/FCF (enterprise value / free cash flow): Compares enterprise value to free cash flow (cash available after operating expenses and capital expenditures). Good when cash conversion is a key value driver and FCF is positive and stable.
– P/FFO or P/AFFO (price / funds from operations or adjusted FFO): Used for REITs and some real‑estate businesses where depreciation understates economics.
– Sector or asset‑specific multiples: Examples include EV/Reserves (mining/oil & gas), EV/Subscriber or EV/Active User (tech/media), EV/EBITDAR (airlines/hotels — adds rent/lease adjustments), and Price/Loan Book (banks). Choose the metric that best reflects what drives value in the industry.
Step‑by‑step checklist to run a comparable‑company analysis
1. Define the valuation purpose and time frame. State whether you value equity or enterprise, and whether you use trailing (historical) or forward (consensus/forecast) figures.
2. Select an initial peer universe. Use industry classification, products, customers, geography, and business model as filters.
3. Prune the peer list. Remove outliers (different scale, non‑recurring events, public/private differences) and peer candidates with poor data availability.
4. Collect standardized financials. Use the same accounting basis, fiscal periods, and currency; convert if necessary.
5. Compute market and capital structure metrics.
– Market capitalization = share price × diluted shares outstanding.
– Enterprise value (EV) = market cap + total debt + minority interests + preferred stock − cash and cash equivalents.
6. Calculate multiples consistently.
– P/E = Market cap / Net income
– EV/EBITDA = EV / EBITDA
– EV/Revenue = EV / Revenue
– EV/FCF = EV / Free cash flow
Note: use trailing 12 months (TTM) or consensus forward figures consistently.
7. Summarize the peer multiples (median and range). Report mean, median, 25th/75th percentiles; flag outliers.
8. Apply multiples to the target. Use medians (or a justified percentile) and compute implied EV or equity value.
9. Convert implied EV to equity value (if starting from EV): Equity value = EV − debt + cash (adjust for minority interest, preferred, etc.). Then compute implied per‑share values.
10. Perform sensitivity analysis. Vary the multiple and/or operating metric to show a value range.
11. Document assumptions, adjustments, and data sources. Be explicit about fiscal years, nonrecurring items, share counts, minority claims, and any normalizations.
Worked numeric example (compact)
Assumptions:
– Peer median EV/EBITDA = 8.0x; peer median P/E = 15.0x.
– Target firm: EBITDA = $120 million (next‑twelve‑months), Net income = $40 million.
– Target capital structure: Debt = $300 million, Cash = $50 million.
– Shares outstanding = 50 million.
Step A — EV/EBITDA approach:
– Implied EV = 8.0 × $120m = $960m.
– Implied equity value = EV − debt + cash = $960m − $300m + $50m = $710m.
– Implied share price = $710m / 50m = $14.20 per share.
Step B — P/E approach:
– Implied equity value = 15.0 × $40m = $600m.
– Implied share price = $600m / 50m = $12.00 per share.
Sensitivity (example ranges):
– If EV/EBITDA = 7.0x → EV = $840m → equity = $590m → price = $11.80.
– If EV/EBITDA = 9.0x → EV = $1,080m → equity = $830m → price = $16.60.
Interpretation:
– The two multiples give different implied prices (P/E lower than EV/EBITDA here). Explain differences by examining capital structure effects, non‑operating items, or forecast biases in peer earnings.
Best practices and practical adjustments
– Use medians more than means to reduce skew from big outliers.
– Normalize earnings for nonrecurring items (restructuring, one‑off gains/losses).
– Align fiscal year ends or use TTM values to avoid seasonal distortions.
– Adjust for differences in margins, growth, and capital intensity by applying premiums/discounts or using growth‑adjusted multiples (see PEG caveat below).
– Reconcile currency and accounting standards (GAAP vs IFRS) if peers are cross‑border.
– When applying EV multiples, ensure capital items (leases, pension deficits) are consistently treated.
Common extensions
– PEG ratio (price/earnings to growth): P/E divided by earnings growth rate. It attempts to adjust P/E for growth, but suffers from sensitivity to growth estimates and negative/zero growth; use cautiously.