Valuecruncher Valuation Reports include three approaches to valuation: economic (DCF), comparable and accounting (NTA). This newsletter discusses the role comparable company analysis plays in valuation.
Where DCF (discounted cash flows) and NTA (net tangible assets) focus on the specific characteristics of the company being valued comparable company analysis uses a relative approach. This relative approach values the company based on the market valuation of similar companies.
Comparable company valuation uses the valuation ratio of a publicly traded company or from the sale of a company and applies that ratio to the company being valued. The valuation ratio typically expresses the valuation as a function of a measure of financial performance (e.g. revenue, EBITDA or EBIT), occasionally operating metrics such as number of employees, customers or register users will be used in valuation ratios. The valuation figure used generally reflects the enterprise value (EV) or the value of the equity in the business; the equity value is usually represented by the share price.