A relative valuation method that values a company by comparing its financial metrics to publicly traded peers — establishing a market-derived valuation range.
Deeper Explanation
Comparable company analysis ("comps") identifies a set of similar businesses and applies their median valuation multiples (EV/EBITDA, P/E, P/S) to the target company's financials. The method assumes that similar businesses should trade at similar multiples — a logical but fragile assumption. Comps valuations are relative: they identify whether a company is cheap or expensive versus peers, not whether the entire peer group is cheap or expensive versus intrinsic value. In a sector-wide bubble, all comps look "fairly valued" against each other. Graham would note that relative cheapness is not the same as absolute cheapness — a stock can be the cheapest in an expensive universe and still be overpriced against intrinsic value.
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