Comparative Company Analysis

Introduction

Comparative Company Analysis (CCA) is a process used to compare two similar companies, operating in the same industry. It is a valuation methodology that allows users to evaluate the ratios of similar public companies and use those ratios to derive the value of another company. CCA assists users in determining the relative value of a company. It is different from other methods that allow users to determine the intrinsic value of a company, such as Discounted Cash Flow analysis.

How to perform Comparative Company Analysis?

Performing CCA is simple and straightforward. First of all, users need to analyze different companies and obtain those that are suitable for comparison. This process needs them to perform some research and also requires some judgment on their part. When trying to find companies for comparison, users should consider companies that are in the same industry and geographical location. Usually, CCA works best for companies that are competitors.

Once the user selects different companies to use in CCA, the next step is to obtain their financial statements and other financial information. For public listed companies, these are available in their relevant stock markets or their websites. For private listed companies, the financial statements may be difficult to obtain. Usually, private listed companies also have their financial statements on their websites. However, for some others, they may not be available at all.

Once the user obtains the required financial information of the selected companies, the process of comparative analysis begins. Users can use different metrics to compare those companies. These metrics include share price, market capitalization, Enterprise Value (EV), revenues, net profits, EBITDA, EPS, etc. Similarly, users can also calculate different ratios for companies. These ratios may include EV/EBITDA, EV/Revenue, Price to Earnings, Price to Book value, etc. There are online templates available that users can also use as a base for CCA.

Finally, users can interpret the information from the CCA to make decisions regarding the company in question. Usually, the interpretation and decision depend on the needs of the users. There are no specific rules regarding how they should interpret the information. CCA can only help users analyze quantitative information. Therefore, users must understand that the results obtained through CCA will not consider qualitative factors.

Advantages of Comparable Company Analysis

Comparable Company Analysis can help users determine a benchmark value-based on the firm valuation. It provides them with a tool to compare and assess the financial performance of different companies better. The information obtained through CCA relates to real market data. Therefore, it is better than other tools that depend on estimations and forecasts. Furthermore, CCA is easy to calculate and explain, making it a superb tool for users of all levels.

Disadvantages of Comparable Company Analysis

The main disadvantage of CCA is that it requires many different companies for the best results. If there are a few comparable companies, the tool may not provide accurate results. Similarly, which companies qualify for comparison depends on the users’ judgment. Furthermore, there are no companies that one may consider truly comparable.

Conclusion

Comparable Company Analysis is a tool that allows users to compare similar companies in the same industry. For CCA, users need to select similar companies first and obtain financial information about them, including their financial statements. Then they can use different metrics and ratios to compare these companies. The interpretation of these comparisons depends on the needs of the users. CCA may have some advantages and disadvantages, given above.

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