Comparable Company Analysis (CCA)
What is the Definition of a Comparable Company Analysis? (CCA)
A comparable company analysis (CCA) is a method of determining a firm's worth by comparing it to other businesses of similar size in the same industry. The idea behind comparable company research is that similar firms will have similar valuation multiples, such as EV/EBITDA. In order to compare firms, analysts collect a list of accessible facts for each one and generate valuation multiples.
Comparable Company Analysis: An Overview (CCA)
A comp analysis, or similar business analysis, is one of the first skills that any banker learns. Creating a similar company study is a rather simple process. The data in the report is used to calculate an approximate estimate of the stock price or the worth of the company.
TAKEAWAYS IMPORTANT
The technique of comparing firms based on similar measures to calculate their enterprise value is known as comparable company analysis.
The valuation ratio of a firm indicates whether it is cheap or overpriced. The ratio is overpriced if it is high. If it's low, the business is undervalued.
Enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S) are the most frequent valuation metrics used in comparable company research.
Analysis of Comparable Businesses
Establishing a peer group of similar firms of similar size in the same sector or location is the first step in a comparable company study. Investors may then compare a company's performance to that of its competitors on a relative basis. This data may be used to compute a firm's enterprise value (EV) and other ratios that can be used to compare a company to its peers.
Comparable vs. Relative Company Analysis
A corporation can be valued in a variety of ways. Cash flows and relative performance against peers are the most prevalent techniques. Cash-based models, such as the discounted cash flow (DCF) model, can assist analysts in determining an intrinsic value based on future cash flows. After that, the value is compared to the current market value. The stock is undervalued if its intrinsic value is greater than its market value. The stock is overpriced if its intrinsic worth is less than its market value.
Analysts seek to corroborate cash flow valuation through comparable comparisons in addition to intrinsic valuation, and these relative comparisons allow the analyst to build an industry benchmark or average.
Enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S) are the most frequent valuation metrics used in comparable company research. The firm is overpriced if its valuation ratio is higher than the peer average. The firm is undervalued if the valuation ratio is lower than the peer average. When used together, intrinsic and relative valuation models give an approximate estimate of valuation that analysts may use to determine a company's genuine value.
Metrics for Valuation and Transactions Used in Competitions
Transaction multiples can also be used to calculate comps. Recent purchases in the same industry are referred to as transactions. Analysts compare multiples based on the company's acquisition price rather than the stock price. If all firms in a certain industry are selling for 1.5 times market value or 10 times earnings, an analyst may use the same amount to back into the value of a peer company based on these benchmarks.
