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Part 3: Relative Valuation: Comparable Company Analysis (Comps)
What is Comparable Company Analysis (Comps)?
Imagine you're trying to figure out the price of your house. A great way to do this is to look at the prices of similar houses that recently sold in your neighborhood. You'd look at houses with a similar number of bedrooms, square footage, and yard size.
Comparable Company Analysis (Comps) is the exact same idea, but for businesses. We find a group of similar public companies (the "comparable universe") and look at what they are worth to figure out a valuation for our target company. We use financial ratios called "multiples" to make these comparisons.
But before we can compare, we need to understand the two main ways to measure a company's value:
Part 1: The Two Key Measures of Value:
Think of a company's value in two ways: what the owners get (Equity Value) and what it would cost to buy the whole thing outright (Enterprise Value).
Equity Value (or Market Capitalization)
What it is: This is the value of the company that belongs only to the shareholders (the owners). It's the part of the company they would get to keep if they sold all their shares today.
Simple Analogy: Imagine your house is worth £500,000. That's its total value. But you have a mortgage of £300,000. Your personal stake, or your "equity" in the house, is £200,000 (£500,000 - £300,000). Equity Value is like that—it's the value for the owners after considering the company's debt.
The Formula: For a public company, it's easy to calculate:
Equity Value = Current Share Price × Total Number of Shares Outstanding
Who it represents: Shareholders only.
Enterprise Value (EV)
What it is: This is the value of the company's core business operations to everyone who has a claim on it. This includes shareholders (equity holders) and lenders (debtholders). It represents the total cost to acquire the entire company, free and clear of its debt.
Simple Analogy: To buy your £500,000 house, a buyer couldn't just give you your £200,000 of equity. They would have to pay the full £500,000 to you and the bank to acquire the house completely. That's the Enterprise Value.
The Formula: We start with Equity Value and adjust for debt and cash.
Enterprise Value = Equity Value + Net Debt
Net Debt: This is the company's total debt minus its cash.
Total Debt: Money the company has borrowed from banks or investors.
Cash: The company has cash on hand, which a new buyer would get. Since cash can be used to pay down debt immediately, we subtract it. Think of it as a refund on the purchase price.
Who it represents: All capital providers (shareholders AND debtholders).
Part 2: The Golden Rule of Valuation Multiples
A multiple is just a ratio: Value / Performance Metric. We use it to see how a company is valued relative to its performance (like its sales or profits).
The "Golden Rule" is simple but critical: The numerator (top part) and the denominator (bottom part) of the ratio must represent the same group of people.
Mixing them up is like comparing the total price of a house (Enterprise Value) to just your personal profit from the sale after paying the mortgage (Net Income). It doesn't make sense!
Imagine you and your friend both buy a house to rent out. Both houses are identical and cost £100,000
Your House: You paid the full £100,000 in cash. You have no mortgage.
Your Friend's House: She paid £10,000 of her own money and got a £90,000 mortgage from the bank.
Both houses have the same total value (£100,000), but the ownership structure is different.
You both rent out your houses. They are identical, so they both bring in £10,000 a year in rent.
Your House's Profit: You have no mortgage to pay. So, after a year, you pocket the full £10,000.
Your Friend's House's Profit: She has a mortgage. The annual mortgage payment to the bank is £4,000. So, after a year, she pockets £6,000 (£10,000 rent - £4,000 mortgage).
The Simple Rule of Fair Comparison
Now, if we want to compare how "valuable" these houses are based on the money they make, we have to be fair.
A FAIR Comparison:
Let's compare the TOTAL PRICE of each house to the TOTAL RENT each house brings in.
Your House: Total Price / Total Rent = £100,000 / £10,000 = A ratio of 10
Your Friend's House: Total Price / Total Rent = £100,000 / £10,000 = A ratio of 10
This works! The ratio is the same for both. It proves that the houses are equally good investments based on their total price and total rental income. We are comparing the whole thing to the whole thing.
An UNFAIR Comparison:
Now, let's try comparing the TOTAL PRICE of each house to the PERSONAL POCKETED CASH of the owner.
Your House: Total Price / Your Pocketed Cash = £100,000 / £10,000 = A ratio of 10
Your Friend's House: Total Price / Her Pocketed Cash = £100,000 / £6,000 = A ratio of 16.7
This is totally misleading! It makes your friend's house look like a worse deal (a higher, more "expensive" ratio). But we know the houses are identical. The comparison is broken.
Why is it broken? Because we compared the value for everyone involved (the £100,000 total price reflects your friend's stake and the bank's stake) with the profit that went to only one person (the £6,000 her pocket after paying the bank).
That's the entire concept. That is the "Golden Rule." Just remember this.
Part 3: Example with calculations
This is all the information we start with, presented in a table.
The Calculation: From Data to Share Price
Here's how we use the data above to find TargetCo's value, step-by-step.
Step 1: Calculate Enterprise Value for the Peer Companies
First, we need to find the total value (Enterprise Value) for each of our comparable companies.
Peer A:
Equity Value = £10.00/share × 100m shares = £1,000 million
Enterprise Value = £1,000m + £200m Net Debt = £1,200 million
Peer B:
Equity Value = £25.00/share × 80m shares = £2,000 million
Enterprise Value = £2,000m + £400m Net Debt = £2,400 million
Peer C:
Equity Value = £18.00/share × 150m shares = £2,700 million
Enterprise Value = £2,700m + £500m Net Debt = £3,200 million
Step 2: Calculate the Valuation Multiples for the Peers
Step 3: Determine the Market Multiple
The EV/EBITDA multiple for all three peers is 8.0x. This is our clear "market rate". We will use this to value TargetCo.
Market Multiple = 8.0x
Step 4: Calculate TargetCo's Implied Enterprise Value
We now apply the market rate to our TargetCo's EBITDA.
Implied EV = TargetCo's EBITDA × Market Multiple
Implied EV = £350 million × 8.0
Implied EV = £2,800 million
This is our estimate for the total value of TargetCo.
Step 5: Calculate TargetCo's Implied Equity Value
Now, we work backwards to find the value that belongs only to shareholders.
Implied Equity Value = Implied EV - Net Debt
Implied Equity Value = £2,800 million - £600 million
Implied Equity Value = £2,200 million
Step 6: Calculate TargetCo's Implied Share Price
Finally, we divide the equity value by the number of shares to find the price per share.
Implied Share Price = Implied Equity Value / Shares Outstanding
Implied Share Price = £2,200 million / 200 million
Implied Share Price = £11.00
Based on its peers, the calculated value of TargetCo is £11.00 per share.
If you’re valuing the business as a whole → the final number is Enterprise Value.
If you’re valuing just the stock (shareholders’ piece) → the final number is Equity Value or Implied Share Price.
In a COMPS presentation, the EV is the main valuation output, but the headline number for investors is the share price, because that’s what they can actually buy or sell.
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