Comparable Trading and Transactions multiples valuation (also known as relative valuation; or trading comps and transaction comps) is among the most commonly employed methods and is typically used to value a variety of assets. The aim of relative valuation is to calculate the value of a given asset as determined by the current market value of similar assets.
Comparable Trading analysis factors both a company’s current trading price and the current trading prices of its competitors in order to arrive at a value that is in line with the valuation multiples of comparable publicly traded companies. Common multiples considered for this form of valuation include P/E (Price to Earnings) or EV/EBITDA (Enterprise Value to Earnings Before Taxes Depreciation and Amortization), although appropriate multiples are often instry specific.
Comparable Transactions analysis determines the value of a company by factoring the valuation multiples paid in the acquisition of similar companies over the course of time. For this type of analysis, it is common to proce a list of Mergers and Acquisitions transactions viewed as equivalent. The collection of this information can prove difficult as the data required for Comparable Transaction valuation is often lacking e to the private nature of many acquisitions and divestitures. It is not uncommon for financial ratios as well as instry-specific ratios and multiples to be considered in the performance of Comparable Transactions valuation.
Tradings comparables and transaction comparables valuation is regularly employed for a number of different reasons. The process can be undertaken much quicker and with higher efficiency than Discounted Cash Flow (DCF) valuation. Furthermore, the intuitive nature of relative valuation is far more appealing to prospective buyers than the rather technical nature of DCF. There are, however, certain challenges inherent to the use of comparable valuation. Firstly, no two companies are exactly alike and their difference can often be difficult to express. For some companies, it may prove difficult to ascertain their true value based on thin trading patterns and small market capitalizations. Additionally, the volatile and often emotional nature of the markets may present stock prices that fail to accurately represent a company’s intrinsic value.
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