What are certain points to look out for when doing Comparable Company Analysis? - Seedly

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Asked on 06 Mar 2019

What are certain points to look out for when doing Comparable Company Analysis?

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Terence Tan
Terence Tan, Finance at Singapore Management University
Level 3. Wonderkid
Answered on 06 Mar 2019

I assume Comparable Company Analysis means just comparing companies using financial figures.

If that is the case, I normally look at Gross Margin and Net Margin. The differences could be due to strategy. If they have sort of similar strategy, then the higher one probably has better competitive edge.

Furthermore, I will look a bit into their balance sheet to see if it is similar. Let's say if we look at developers, we will be expecting the use of leverage. If a company is not even using leverage, or much lower than others, it can be an interesting look into their strategy.

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Answered on 06 Mar 2019

I think finding what are good comparable companies in the first place would be most important! Size, sector, growth rates, profitability, distribution channels are all ways to look for comparable companies. If you have access to a Bloomberg terminal, they also display a range of comparable companies.

I would think another important point to look out for is whether the shares are trading at trailing multiples or forward multiples. Along the lines of multiples, a lot of it also depends on what are the most important multiples in forming the comparable companies. Typically EV / EBITDA is used, but industry specific multiples can also be employed. For eg, EV / NAV for real estate, EV / users for tech companies in their growth phase etc. I would think understanding the logic behind the multiples is more important.

The cyclicality of the industry may be something to look out for also, with highs and lows often affecting the valuation given by market participants.

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