How public comps work

How do you know how much a company is worth? Analysts usually calculate the number through three types of relative and intrinsic valuation models: private comps, public comps and discounted cash flow (DCF) analysis. Used together, these valuation methods can help investors, business owners and transaction advisors gauge a company’s current market value and then assess if that company is under- or overvalued.
 

Previously, we looked at how private comps—also known as M&A comps or precedent transactions—help analysts compare private companies in a similar growth stage and industry to determine a company’s value within the private markets.
 

The next step in assessing the value of a company usually involves another similar type of relative valuation model: Public comps analysis. Here’s a quick overview of how the process works.

What are public comps?

The term public comps is short for “public comparables,” which means exactly what it sounds like: publicly owned companies that are like the one you’re trying to assess the value of.
 

A public comps analysis is simply the act of comparing publicly traded companies operating in a similar sector and location to the valuation company, usually with similar levels of revenue and market capitalization (aka the total value of a company’s shares of stock). Both are telling numbers that are either not always or never available, respectively, for private companies.
 

In practice, looking at public and private comps is similar in concept to how home appraisals work. You start by looking at the property (read: company) you’re trying to assess the value of, then you look for several comparable ones in the neighborhood to determine how the property you’re appraising stacks up against them based on a series of defined variables.

In the world of business valuations, those defined variables are expressed as financial multiples, averages, ratios and benchmarks. The implied assumption: The company that’s being valued should have the same—or at least similar—multipliers as its competitors.
 

Common public comps valuation measures

These are the most common valuation measures used in public comps analysis:

• Enterprise value to sales (EV/S)—compares the total value of a company (accounting for its stock shares, debt and cash) to its annual sales. This gives analysts an idea of how much it costs to purchase the company’s sales.
   
• Price to earnings (P/E)—measures a company’s current share price relative to its per-share earnings (EPS), which is calculated by taking a company’s profit divided by the outstanding shares of its stock. This allows analysts to determine the relative profitability of a company.
   
• Price to book (P/B)—compares market value (a company’s outstanding shares multiplied by its current market price) and book value (the value of a company’s assets) by dividing the price per share by book value per share (BVPS). A lower P/B ratio could mean the stock is undervalued—or that something could be fundamentally wrong with the company.
   
• Price to sales (P/S)—compares a company’s stock price to its revenues. This is done by dividing a company’s current stock price by the sales per share, which is calculated by dividing a company’s sales by its number of outstanding shares. This lets analysts know how much investors are currently willing to pay per dollar of a company’s sales for its stock. A low ratio may indicate the stock is undervalued, while a high ratio suggests possible overvaluation.

Why consider public comps?

Overcoming the difficulty of calculating a valuation—and mitigating risk in an investment—starts with having the right level of information to be confident in your deal terms. And there’s generally more financial information available for publicly owned companies.
 

The reason for this is simple: Private companies aren’t required to disclose the same level of detailed financial information that publicly owned businesses are.
 

This means public comps analysis is generally the easiest to perform, because the information required to do the analysis is readily available. All it requires is that the comparable companies each have publicly traded securities—and the data (at least in the United States) is usually sound, because it’s scrutinized by the US Securities and Exchange Commission as well as each company’s shareholders.
 

However, public comps analysis is typically best used when a minority stake in a company is being acquired or a new issuance of equity is being considered. That’s because there’s no control premium to consider, which is subjective by nature and best assessed through comparing precedent transactions.
 

In the latter scenario, conducting a private comps analysis using extensive private market data, including earnings before interest, tax, depreciation and amortization (EBITDA), pre- and post-money valuations, multiples and deal sizes, becomes more important.

How public comps analysis works

These are the steps generally taken when considering public comps:

This process provides analysts a range of valuation multiples to compare their target company to—all derived from financial data readily available within the public markets.

Find out how PitchBook can help simplify your valuation workflow by checking out our full suite of valuation tools.