Exam (elaborations)
Trading Comps.
Exam of 8 pages for the course TETSS at TETSS (Trading Comps.)
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Trading CompsWhy we use trading comps to value companies - correct answer-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.
How are comps analyzed? - correct answer-We don't compare absolute values but rather
multiples to account for differences in a company.
Non-operational differences that shuld be taqken into account so as to not distort the
comparison - correct answer-• 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
What are examples of measures independent of leverage1 - correct answer-EV, Revenue,
EBITDA, EBIT, Unlevered free cash flow
Nonrecurring items in historical profits - correct answer-must be taken out of profits in order
to exclude the distortion
What to do when companies are in different stages in their life cyucle - correct
answer-Multiples like pEG standardize against different long-term growth rates
Ev/revenue facilitate comparisons for early stage companies generating loses.
PE ratio defn and description - correct answer-share price/EPS
Equity Value/ Net income
EPS is used as a proxy for economic equity value
Issues with P/E - correct answer-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
, Less relevant for high growth companies
EPS is most appropriate for - correct answer-• Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
PEG ratio defn and issues - correct answer-PE ratio / long-term growth rate
Standardizes PE ratios against companies' expected growth rates (g)
• Higher PEG ratio companies are considered overvalued
Issues with PEG ratio - correct answer-• 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
PEG ratio is most appropriate for - correct answer-• Companies with positive earnings but at
different lifecycle stages
• Meaningless for negative earnings or negative growth
Price to book ratio defn and description - correct answer-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
Issues with PB ratio - correct answer-• 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
PB ratio is most appropriate for - correct answer-• Banks / manufacturing / other
asset-intensive businesses
EV/EBIT ratio def and description - correct answer-Enterprise value / Earnings before
interest & taxes
• Isolates core operations without impact of financing decision (interest
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