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
1/
,•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
2/
, 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
3/
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