Fundamental analysisModule 6, lesson 35 of 48
Comparable-company valuation
How relative valuation uses peer multiples to value a company, how to select and clean comparables, and how to combine relative and absolute methods sensibly.
In this lesson
- Value a company by applying peer multiples to its own earnings, EBITDA or book value.
- Select comparable companies and clean their figures so the comparison is fair.
- Adjust a peer multiple for differences in growth, returns and risk.
- Combine relative and absolute valuation into a sensible range.
Builds on
- Comparing valuations with history and peersThat lesson explains how to choose peers and compare multiples fairly.
- What intrinsic value meansRelative valuation is one of the two main approaches introduced there.
On this page
In simple terms
Comparable-company valuation, often called relative valuation or "comps", values a business by looking at how the market values similar businesses. If similar companies trade at around 20 times earnings, a company with ₹100 crore of earnings might be worth around ₹2,000 crore, after allowing for any differences.
It is quick, uses real market prices, and is widely used by analysts and in deals. Its weakness is the assumption that the comparison companies are themselves fairly valued.
The steps
- Choose comparable companies, as the history and peers lesson explains.
- Choose the multiple that suits the sector: P/E for steady earners, EV/EBITDA or EV/EBIT where debt and depreciation differ, P/B for banks.
- Clean the figures: remove one-offs, use the same period (trailing or forward) for every company, and adjust for accounting differences.
- Take the median multiple and the range.
- Adjust for differences between the company and its peers.
- Apply the multiple to the company's own figures, and convert enterprise value to equity value where needed.
A worked example
Worked example: Valuing a made-up company with peers
Godavari Logistics has EBITDA of ₹500 crore, net debt of ₹800 crore and 40 crore shares. Four peers, all made up, trade at these EV/EBITDA multiples:
| Peer | EV/EBITDA |
|---|---|
| Peer A | 8.0 |
| Peer B | 9.5 |
| Peer C | 10.5 |
| Peer D | 15.0 (recently acquired a fast-growing business) |
The median is 10.0; the average, 10.75, is pulled up by Peer D.
| Implied enterprise value: 10 × 500 | ₹5,000 crore |
|---|---|
| Less net debt | ₹800 crore |
| Implied equity value | ₹4,200 crore |
| Value per share: 4,200 ÷ 40 | ₹105 |
| Using the peer range, 8 to 10.5 times, excluding D | ₹80 to ₹111 per share |
Adjusting for differences
Peers are never identical. If the company grows faster, earns higher returns, carries less debt or has better governance than the median peer, a higher multiple may be justified; if worse, a lower one. Make adjustments explicit and modest, and write down why. A common error is to adjust every difference in the direction that supports the answer you want.
Relative value is not absolute value
Comparable-company valuation answers: how is this company priced relative to others? It does not answer whether any of them is good value. If the whole sector is in fashion, every company in it may be overvalued, and a company that looks cheap against its peers may still be expensive. That is why relative valuation should be combined with an absolute method.
Combining relative and absolute methods
A DCF values the business on its own cash flows; comparables value it against the market. Together they give a range:
Worked example: Bringing methods together
For Godavari Logistics, an analyst finds:
| Method | Value per share |
|---|---|
| Peer EV/EBITDA, 8 to 10.5 times | ₹80 to ₹111 |
| Peer P/E, cleaned | ₹90 to ₹115 |
| DCF, bear to bull | ₹70 to ₹125, base ₹98 |
The methods broadly agree around ₹90 to ₹110. If the share trades at ₹65, below every method's range, it may deserve closer study. If one method had given a very different answer, the reason would be worth investigating: perhaps the peers are all expensive, or the DCF's growth is too optimistic.
Why it matters
Relative valuation is the language of the market: brokers, deal makers and investors constantly compare multiples. Doing it carefully, with clean figures, sensible peers and explicit adjustments, turns a rough habit into a useful check. Combining it with absolute valuation guards against both over-optimistic forecasts and sector-wide bubbles.
Limitations
Good comparables are often scarce, especially for unusual businesses. Multiples reflect current market moods, which can be extreme. Accounting differences, one-offs and different growth phases make cleaning the figures a matter of judgement. The result is only as good as the peers chosen.
Common mistakes
- Using the average when one peer is extreme.
- Forgetting to subtract net debt after applying an EV multiple.
- Mixing trailing and forward figures.
- Choosing peers to reach a desired answer.
- Treating relative value as absolute value.
Try it yourself
- Choose a listed company and three to five genuine peers.
- Collect each one's EV/EBITDA and P/E, using the same period and removing obvious one-offs.
- Apply the median multiples to the company's figures to get a range of value per share.
- Compare the range with your DCF from earlier in this module and with the market price.
Key takeaways
- Comparable-company valuation applies multiples from similar companies, such as P/E or EV/EBITDA, to the company being valued.
- Choose peers with similar products, customers, growth, returns and risk, and clean their figures of one-offs and accounting differences.
- Use the median of the peers' multiples and adjust it for differences between the company and the group.
- Relative valuation shows how a company is priced compared with others. If the whole group is overvalued, it will be too.
- Combine it with a DCF, and investigate when the two give very different answers.
Check your understanding
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Terms used in this lesson
- Peer group
- A set of companies similar enough in products, customers, growth, returns and risk that their valuations can be compared.
- EV/EBITDA
- Enterprise value divided by EBITDA, a valuation multiple that compares companies with different debt and depreciation fairly.
- P/E ratio
- The price-to-earnings ratio, the share price divided by earnings per share, showing how much investors pay for each rupee of yearly profit.
- Intrinsic value
- An estimate of what a business is worth based on the cash it can return to its owners over its life, as opposed to its market price.
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This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.