Trading comparables

Trading comparables ask what the market is paying today for a stream of earnings from businesses like this one, then apply that multiple to your company's metric. It is the most widely used method precisely because it is grounded in observable prices.

It is a relative measure, not an intrinsic one. It answers what this business is worth if the market's current view of the sector is right, which is a different question from what it is worth. If the whole sector is mispriced, comps carry the mispricing straight into your answer, and only a DCF can disagree.

Because the multiples come from open market share prices, the output is a minority value: it reflects what someone pays for a small stake with no ability to direct the business. Getting to a control value requires a premium, which is what precedent transactions supply.

The peer set is the analysis. Peers should share business model, margin structure, growth profile, capital intensity and end market exposure, and being in the same nominal industry is not enough. A tight set of four genuinely comparable companies beats a defensible looking list of twelve.