Comparable Company Analysis: Step-by-Step Guide for IB Interviews

Comparable company analysis ('trading comps') is the most frequently used valuation methodology in investment banking. It's quick, market-based, and provides a clear valuation range. Interviewers will expect you to know how to build one from scratch.

Step 1: Select the Comparable Universe

Choose publicly traded companies that are similar to your target across these dimensions:

• Industry and sub-sector: Same industry is the minimum. Ideally the same niche – a SaaS company should be compared to other SaaS companies, not all tech.
• Size: Similar revenue, EBITDA, or market cap. Larger companies often trade at higher multiples.
• Geography: Companies in the same region face similar macro conditions, regulatory environments, and investor bases.
• Growth profile: High-growth companies trade at higher multiples. Comparing a 30% grower to a 5% grower will distort results.
• Margin profile: Companies with higher margins typically command premium multiples.

Aim for 5–15 comparable companies. Too few and you lack statistical significance. Too many and you're probably including poor comparisons.

Step 2: Gather Financial Data and Calculate Multiples

For each comparable company, calculate the relevant valuation multiples:

EV/EBITDA: The most common. Capital-structure neutral, ignores non-cash charges. Works for most sectors.

EV/Revenue: For pre-profit or high-growth companies where EBITDA is negative or misleading.

P/E: Equity-level multiple. Useful for comparing companies with similar capital structures.

You'll need to decide between LTM (Last Twelve Months) and NTM (Next Twelve Months) multiples:

LTM multiples: Based on actual historical results. More objective, no forecasting uncertainty. But backward-looking.

NTM multiples: Based on consensus analyst estimates for the next 12 months. Forward-looking and more relevant for growth companies, but rely on estimates.

NTM is generally preferred for growth companies. LTM is preferred for stable, mature businesses. Always specify which you're using.

Step 3: Calendarise

Not all companies have the same fiscal year end. If one comp has a December year-end and another has a March year-end, their trailing 12-month periods don't align. Calendarisation adjusts the financials to a common period (usually the calendar year) so multiples are truly comparable.

For example, to calendarise a March year-end company to a December period: take 9 months of the current fiscal year and 3 months of the prior fiscal year. In practice, this is handled by your data provider (Bloomberg, CapIQ), but you should understand the concept.

Step 4: Determine the Valuation Range

Calculate the mean, median, and range of multiples across your peer group. Trim outliers – if one company trades at 25x EBITDA when the rest are 8–12x, it's distorting the average. The median is generally more reliable than the mean because it's less affected by outliers.

Decide where your target should trade within the range. If the target has higher growth and margins than the median comp, it deserves a premium. If it's smaller or lower growth, it might trade at a discount.

Step 5: Apply to the Target

Take the selected multiple range and apply it to the target's corresponding financial metric. For example: if the peer median EV/EBITDA is 10x and the target's EBITDA is £50m, the implied Enterprise Value is £500m. Use the 25th and 75th percentile multiples to create a range (e.g., £400m--£600m).

Then bridge from Enterprise Value to Equity Value (subtract net debt, MI, preferred, add associates) and divide by diluted shares for an implied share price range.

Common Mistakes to Avoid

Mixing EV and equity multiples: Never pair EV with Net Income or P/E with EBITDA. Always match pre-debt metrics with EV and post-debt metrics with Equity Value.

Ignoring one-off items: If a comp had a one-time restructuring charge that depressed EBITDA, the multiple looks inflated. Normalise for non-recurring items.

Too many or too few comps: 5–15 is the sweet spot. Below 5, the data is unreliable. Above 15, you're probably including poor comparisons.

Not adjusting for growth differences: A comp growing at 30% should trade at a higher multiple than one growing at 5%. If you don't account for this, your valuation range is misleading.