Comparable Company Analysis (CCA)
Candlefocus EditorIn CCA, the target company is compared with other similar companies in terms of market capitalization, industry, product range, and market positioning among other factors.The idea is that a company is worth only as much as similar companies are, considering their respective financial performance.
To calculate the fair market value of a business, the financial performance metrics from the target entity are benchmarked against similarly-sized companies. This allows a better estimation of the company’s worth than historical performance, since it is more reflective of market prices on the stock exchange.
The resulting output of CCA is called a “trading multiple” which is multiplied by one of the target company’s financial metrics such as sales or earnings. By comparing the trading multiple of similarly-sized companies with the target company, a more accurate enterprise value of the business can be realized.
There are some drawbacks to CCA as it can lead to unequal comparisons due to the factors mentioned earlier. Additionally, it might be difficult to attain accurate comparable data, as some financial information may be withheld by public companies or the multiples of private companies are often unknown.
Through CCA, investors, analysts, and accountants can provide more accurate estimates of the worth of a company and assist in business valuation. Comparable market values also provide a quick snapshot of market capitalization and enterprise value trends, useful for investors when researching similar companies for mergers, investments, or acquisitions.