Comparable company analysis: approach, adjustments, and interpretation

Graziano Stefanelli
Aug 17, 2025
4 min read

Comparable company analysis (comps) is a widely used relative valuation method in corporate finance, investment banking, and equity research.

It estimates the value of a company by comparing it to a group of publicly traded peers with similar characteristics, applying the valuation multiples observed in the peer group to the target company’s financial metrics.

Unlike discounted cash flow (DCF), which is an intrinsic valuation approach based on projected cash flows, comps are market-based, reflecting how similar businesses are currently valued by investors.This makes them particularly useful for IPO pricing, M&A negotiations, and fairness opinions, as they capture prevailing market sentiment and sector-specific trends.

The selection of comparable companies is the foundation of a credible comps analysis.

The peer group should include companies that share key similarities with the target in terms of industry, size, geographic exposure, growth prospects, and business model.

This selection process requires careful screening using both quantitative and qualitative factors.

Quantitative factors include:

Revenue size and growth rate.
EBITDA margins and profitability profile.
Capital structure and leverage ratios.
Market capitalization and liquidity of shares.

Qualitative factors include:

Product and service offerings.
Customer base and market positioning.
Regulatory environment.
Stage in the business life cycle.

If no perfect comparables exist — a common challenge in niche industries — analysts may adjust the peer group to include companies with similar financial characteristics even if their business models differ slightly.

Selection Criteria	Example for a SaaS Company
Industry	Publicly traded software-as-a-service providers
Size	Revenues between $200M and $1B
Geography	Primarily North America and Europe
Profitability	EBITDA margins between 15% and 30%
Growth Profile	Annual revenue growth above 20%

Valuation multiples translate peer performance into a market-implied value for the target.

The most common equity value multiples include price-to-earnings (P/E), price-to-book (P/B), and price-to-cash flow.Enterprise value (EV) multiples — such as EV/EBITDA, EV/EBIT, and EV/Revenue — are frequently used to control for differences in capital structure and tax rates between companies.

The choice of multiple depends on the industry and the reliability of underlying financial data:

EV/EBITDA is widely used for capital-intensive businesses as it normalizes for depreciation.
EV/Revenue may be used for early-stage, high-growth companies with negative earnings.
P/E is appropriate when earnings are stable and capital structures are similar.

Adjustments are necessary to ensure comparability between the peer group and the target company.

Raw multiples derived from financial databases often require adjustments for non-recurring items, accounting policy differences, and capital structure effects.

These adjustments help normalize earnings and ensure that valuation comparisons reflect ongoing performance.

Examples include:

Removing one-time gains or losses from net income.
Adjusting EBITDA for restructuring charges or unusual litigation expenses.
Normalizing revenue for acquisitions or divestitures during the period.
Converting financials to a consistent currency and applying uniform exchange rates.

Applying multiples to the target’s financial metrics yields a range of implied values.

Once normalized multiples are established for the peer group, the median or mean multiple is typically applied to the target’s relevant metric.

For example, if the median EV/EBITDA for the peer group is 10x and the target’s adjusted EBITDA is $50 million, the implied enterprise value would be $500 million.

A range is often provided by applying the 25th to 75th percentile multiples to account for potential valuation variance.

Metric	Target Value	Peer Median Multiple	Implied Enterprise Value
EBITDA	$50M	10.0x	$500M
Revenue	$200M	3.0x	$600M

Interpretation of comps results requires context beyond raw multiples.

Market sentiment can significantly influence multiples, sometimes pushing them above or below intrinsic value levels.

In bullish markets, multiples may reflect high growth expectations, while in downturns they may embed excessive pessimism.Sector-specific factors — such as regulatory changes, technological disruption, or shifts in consumer demand — can also distort comparisons.

Furthermore, comps reflect a snapshot in time; valuation conclusions may change quickly if peer group stock prices move sharply.For this reason, comps are often used alongside other valuation methods like DCF or precedent transactions to triangulate a fair value range.

Advantages and limitations of the comparable company method should guide its application.

Advantages:

Market-driven and easy to explain to stakeholders.
Relatively quick to perform with readily available data.
Useful for benchmarking a company’s valuation against peers.

Limitations:

Dependent on identifying truly comparable companies, which can be challenging.
Subject to market volatility and sentiment-driven distortions.
Does not capture company-specific competitive advantages that peers lack.

Aspect	Strength	Weakness
Market relevance	Reflects current investor sentiment	Vulnerable to short-term market fluctuations
Accessibility	Public data is widely available	Requires deep due diligence for accurate peer selection
Simplicity	Intuitive and straightforward	Oversimplifies complex differences between companies

Best practices involve disciplined peer selection, transparent adjustments, and regular updates.

To maximize credibility, analysts should:

Clearly document peer selection criteria.
Explain adjustments to financial metrics and multiples.
Use multiple valuation metrics to reduce reliance on a single figure.
Update comps frequently to reflect current market conditions.

When executed with rigor, comparable company analysis provides a robust, market-grounded perspective on valuation that complements intrinsic valuation methods and supports informed corporate finance decisions.

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DATA STUDIOS

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