Comparable Analysis
In short
Values a stock by comparing its ratios to similar companies
If similar houses in your neighbourhood sell for $300/sqft and your house is 2,000 sqft, it's worth roughly $600K. Same logic applies to stocks — take the average P/E or EV/EBITDA of similar companies and apply it to the target's own earnings or EBITDA.
Comps analysis selects a peer group of companies similar in business model, size, growth profile, and geography, then computes valuation multiples for each — P/E, EV/EBITDA, EV/Sales, or P/B, depending on the sector. The target's own metric (earnings, EBITDA, sales) is multiplied by the peer group's average or median multiple to produce an implied value. The method is fast and reflects current market sentiment, which is also its weakness: if the whole peer group is over- or undervalued relative to fundamentals, the target inherits that mispricing. Peer selection is the most subjective step — too narrow a group can be skewed by one outlier, too broad a group mixes businesses with different growth and risk profiles. Comps are typically used alongside a DCF as a market-based sanity check.
Formula
Target Value = Target Metric × Peer Average MultipleRelated concepts
- P/E Ratio — Imagine buying a lemonade stand that makes $100/year. If it costs $2,000, the P/E is 20 — you need 20 years of earnings to pay it off. Lower means cheaper.
- EV/EBITDA — Like P/E but for the entire company including its debt. A company with lots of debt looks cheap on P/E but expensive on EV/EBITDA — this ratio tells the full story.
- DCF Model — Imagine a friend promises to pay you $100/year for 10 years. Would you pay $1,000 today? Not quite — money tomorrow is worth less than money today. DCF calculates what future cash flows are worth right now.