Trading Comparables

Trading comparables value a company based on multiples of similar listed companies. One looks at how the market values comparable companies and applies this to the company being valued. This provides a market-oriented indication of value. The work begins with selecting the peer group by business model, size, growth, margin level, regions and customer base. That selection is the most important and most contentious step, because the result can be steered considerably through the composition of the group.

Multiples are then calculated for each comparable, with attention to consistent reference figures: enterprise value pairs with pre-interest measures, equity value with post-interest measures. The median of the group is normally used, being less sensitive to outliers than the mean. Two adjustments are essential. First, share prices value minority stakes, so a premium for control must be considered when acquiring a majority. Second, unlisted companies are smaller, less liquid and often more dependent on individuals, which justifies discounts.

The method only becomes informative once these differences are disclosed and explained. In practice, enterprise value and market capitalisation are derived from the current price for each comparable and related to revenue, EBITDA, EBIT and net income, both for the last twelve months and for the coming twelve. For unlisted targets a discount for lack of marketability is regularly applied to the derived range. Its size has to be reasoned in practice and should not be set as a flat figure.