Define the company before choosing peers
A peer set begins with the company’s economic drivers: products, customers, revenue model, growth, margins, geography, cyclicality, regulation, capital intensity, and balance-sheet structure. Industry classification and market capitalization are useful screens but not sufficient reasons for comparability.
Candidate peer universe
Start broadly using competitors, company disclosures, industry classifications, transaction materials, and investor research. Record why each candidate belongs. Then separate core peers, secondary peers, and reference companies. Removing a company should require an explicit reason rather than an inconvenient multiple.
Market capitalization and diluted equity value
Basic market capitalization uses basic shares outstanding times price. Valuation commonly requires diluted shares, including the in-the-money effect of options, restricted stock, performance awards, warrants, convertibles, and other instruments according to the analytical purpose. Use a market-data date and reconcile share information to the latest filing and subsequent events.
Enterprise-value bridge
A common bridge begins with diluted equity value, adds debt and debt-like claims, preferred stock, and noncontrolling interests, and subtracts cash and nonoperating investments. Treatment of leases, pensions, securitizations, earnouts, and other items should be consistent across the company and peers.
Operating metrics
Common metrics include revenue, EBITDA, EBIT, EPS, book value, free cash flow, and industry-specific measures. Use historical, current-year, and forward periods with consistent fiscal calendars. For banks and insurers, equity-based metrics often make more sense because financing liabilities are part of operations.
Normalization
Review acquisitions, discontinued operations, restructuring, stock compensation, gains and losses, lease accounting, pension expense, commodity hedges, and foreign exchange. Show reported and adjusted data when the adjustment is judgmental. Avoid “normalizing” every unfavorable item out of the company’s economics.
Selecting the statistic
Median is common because it limits outlier influence, but the distribution matters. Show the full set, quartiles, minimum, maximum, and reasons for outliers. If the target is materially different in growth or margins, use regression, subgrouping, or explicit premium and discount analysis rather than blindly applying the median.
Applying multiples
Apply the chosen multiple to the target’s corresponding metric. Enterprise-value multiples produce enterprise value, which must be bridged to equity value. Equity-value multiples produce equity value directly. Use low, central, and high cases based on the peer evidence and company positioning.
Interpretation
The comp output should explain why the target belongs at a particular point in the range. Growth, margin, recurring revenue, capital intensity, risk, governance, and balance sheet can justify differences. The explanation is more useful than a football-field chart without analysis.
Common errors
- using stale prices with current financials;
- mixing calendar and fiscal periods;
- mixing enterprise and equity metrics;
- ignoring dilution;
- comparing adjusted EBITDA with reported EBITDA;
- including a peer only because management names it;
- excluding outliers without understanding them;
- treating market prices as proof of intrinsic value.