Which valuation method compares a company's equity to competitors or other firms in the same industry?

Which valuation method compares a company's equity to competitors or other firms in the same industry?

• A. Comparables Approach
• B. Discounted Cash Flow
• C. Financial Statement Analysis
• D. Horizontal analysis

Answer: (A)

Comparables analysis values a company by looking at how similar firms are priced in the market and applying those market multiples to the target’s metrics. By using ratios like P/E or EV/EBITDA from peer companies, you capture how investors currently value comparable businesses. Those peer multiples are then applied to the target’s own numbers to estimate its equity value, providing a market-based, relative valuation. This approach is distinct from a discounted cash flow, which builds value from projected cash flows and a chosen discount rate; from financial statement analysis, which compares internal financial ratios without linking to market prices; or from horizontal analysis, which focuses on year-to-year changes rather than valuation.

Comparables analysis values a company by looking at how similar firms are priced in the market and applying those market multiples to the target’s metrics. By using ratios like P/E or EV/EBITDA from peer companies, you capture how investors currently value comparable businesses. Those peer multiples are then applied to the target’s own numbers to estimate its equity value, providing a market-based, relative valuation.

This approach is distinct from a discounted cash flow, which builds value from projected cash flows and a chosen discount rate; from financial statement analysis, which compares internal financial ratios without linking to market prices; or from horizontal analysis, which focuses on year-to-year changes rather than valuation.