Comparable Company Valuation — Simplified
Learning One of the Key Valuation Methods
Comparable company analysis is a method of valuation where you use peers who share similar business characteristics to generate a value for your own company. What the other companies are valued at provides you with an idea of how investors and the market look at those companies.
Similar to how you might shop around different stores to find the perfect jacket at the right price, for this analysis you want to look at multiple companies which resemble the one you’re analyzing. You never want to buy a jacket that is low quality, but also expensive. The same concept applies to investing.
This valuation method is used to value companies ranging from start-ups to Fortune 500 companies. As one of the main ways to value a business or stock, you should know how to go about creating one of these yourself.
Think of houses for an example. Before you buy a house, you may want to look at what other houses on the street are selling for. Do the 3 bedroom houses resemble yours? Is the size of your neighbour's house the same as the property you’re looking to purchase? If all of the houses on your street are the same style, and your’s is selling for much lower than what the others are asking for, you may have found a gem. On the other hand, if your…
