Trading Comps
Study online at https://quizlet.com/_4baex6
1. Why we use trading comps to value companies: The purpose of a trading
comps analysis is to determine what is the "appropriate" value of a
company, based on the market values of operationally similar companies.
When you try to gauge the fair value of your house by comparing to the values of
houses
nearby, you're doing a comps analysis.
2. How are comps analyzed?: We don't compare absolute values but rather multi-
ples to account for differences in a company.
3. Non-operational differences that shuld be taqken into account so as to not
distort the comparison: • Financial leverage differences
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
• Other accounting differences (lease classification, LIFO vs. FIFO)
• Business life cycle differences
4. What are examples of measures independent of leverage1: EV, Revenue,
EBITDA, EBIT, Unlevered free cash flow
5. Nonrecurring items in historical profits: must be taken out of profits in order
to exclude the distortion
6. What to do when companies are in different stages in their life cyucle: Mul-
tiples like pEG standardize against different long-term growth rates
Ev/revenue facilitate comparisons for early stage companies generating loses.
7. PE ratio defn and description: share price/EPS
Equity Value/ Net income
EPS is used as a proxy for economic equity value
8. Issues with P/E: EPS is a measure of accounting profit only during a particular
period
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
Also, high PE valuation relative to peers could be justified when high PE firm has
higher growth prospects
1/8
, Trading Comps
Study online at https://quizlet.com/_4baex6
Less relevant for high growth companies
9. EPS is most appropriate for: • Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
10. PEG ratio defn and issues: PE ratio / long-term growth rate
Standardizes PE ratios against companies' expected growth rates (g)
• Higher PEG ratio companies are considered overvalued
11. Issues with PEG ratio: • EPS is a measure of accounting profit only during a
particular period
• Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions (such as historical vs.
market costing), and can be manipulated
12. PEG ratio is most appropriate for: • Companies with positive earnings but at
different lifecycle stages
• Meaningless for negative earnings or negative growth
13. Price to book ratio defn and description: 1. Equity value / book value of equity
2. Equity value per share / book value of equity per share
3. Book value is often adjusted to exclude goodwill ("tangible book value")
• Compares market value of equity to book value of equity
• Solves "only one period" problem of PE ratios
• For financial institutions whose equity is marked to market, also solves
some of historical cost problems
14. Issues with PB ratio: • For non-financials, book value usually not an accurate
measure of true
equity value because of the historical nature of the balance sheet
• Book value may be negative (large historical losses) making the ratio not
meaningful
15. PB ratio is most appropriate for: • Banks / manufacturing / other asset-inten-
sive businesses
16. EV/EBIT ratio def and description: Enterprise value / Earnings before interest
& taxes
• Isolates core operations without impact of financing decision (interest
expense) and taxes
2/8
Study online at https://quizlet.com/_4baex6
1. Why we use trading comps to value companies: The purpose of a trading
comps analysis is to determine what is the "appropriate" value of a
company, based on the market values of operationally similar companies.
When you try to gauge the fair value of your house by comparing to the values of
houses
nearby, you're doing a comps analysis.
2. How are comps analyzed?: We don't compare absolute values but rather multi-
ples to account for differences in a company.
3. Non-operational differences that shuld be taqken into account so as to not
distort the comparison: • Financial leverage differences
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
• Other accounting differences (lease classification, LIFO vs. FIFO)
• Business life cycle differences
4. What are examples of measures independent of leverage1: EV, Revenue,
EBITDA, EBIT, Unlevered free cash flow
5. Nonrecurring items in historical profits: must be taken out of profits in order
to exclude the distortion
6. What to do when companies are in different stages in their life cyucle: Mul-
tiples like pEG standardize against different long-term growth rates
Ev/revenue facilitate comparisons for early stage companies generating loses.
7. PE ratio defn and description: share price/EPS
Equity Value/ Net income
EPS is used as a proxy for economic equity value
8. Issues with P/E: EPS is a measure of accounting profit only during a particular
period
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
Also, high PE valuation relative to peers could be justified when high PE firm has
higher growth prospects
1/8
, Trading Comps
Study online at https://quizlet.com/_4baex6
Less relevant for high growth companies
9. EPS is most appropriate for: • Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
10. PEG ratio defn and issues: PE ratio / long-term growth rate
Standardizes PE ratios against companies' expected growth rates (g)
• Higher PEG ratio companies are considered overvalued
11. Issues with PEG ratio: • EPS is a measure of accounting profit only during a
particular period
• Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions (such as historical vs.
market costing), and can be manipulated
12. PEG ratio is most appropriate for: • Companies with positive earnings but at
different lifecycle stages
• Meaningless for negative earnings or negative growth
13. Price to book ratio defn and description: 1. Equity value / book value of equity
2. Equity value per share / book value of equity per share
3. Book value is often adjusted to exclude goodwill ("tangible book value")
• Compares market value of equity to book value of equity
• Solves "only one period" problem of PE ratios
• For financial institutions whose equity is marked to market, also solves
some of historical cost problems
14. Issues with PB ratio: • For non-financials, book value usually not an accurate
measure of true
equity value because of the historical nature of the balance sheet
• Book value may be negative (large historical losses) making the ratio not
meaningful
15. PB ratio is most appropriate for: • Banks / manufacturing / other asset-inten-
sive businesses
16. EV/EBIT ratio def and description: Enterprise value / Earnings before interest
& taxes
• Isolates core operations without impact of financing decision (interest
expense) and taxes
2/8
