What Is a Comparable Company Analysis (CCA)
A comparable company analysis (CCA) is a process used to evaluate the value of a company using the metrics of other businesses of similar size in the same industry. Comparable company analysis operates under the assumption that similar companies will have similar valuation multiples, such as EV/EBITDA. Analysts compile a list of available statistics for the companies being reviewed and calculate the valuation multiples in order to compare them.
Comparable Company Analysis (CCA)
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Understanding Comparable Company Analysis (CCA)
One of the first things every banker learns is how to do a comp analysis or comparable company analysis. The process of creating a comparable company analysis is fairly straightforward. The information the report provides is used to determine a ballpark estimate of value for the stock price or the firm's value.
Key Takeaways
- Comparable company analysis is the process of comparing companies based on similar metrics to determine their enterprise value.
- A company's valuation ratio determines whether it is overvalued or undervalued. If the ratio is high, then it is overvalued. If it is low, then the company is undervalued.
- The most common valuation measures used in comparable company analysis are enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S).
Comparable Company Analysis
Comparable company analysis starts with establishing a peer group consisting of similar companies of similar size in the same industry or region. Investors are then able to compare a particular company to its competitors on a relative basis. This information can be used to determine a company's enterprise value (EV) and to calculate other ratios used to compare a company to those in its peer group.
Relative vs. Comparable Company Analysis
There are many ways to value a company. The most common approaches are based on cash flows and relative performance compared to peers. Models that are based on cash, such as the discounted cash flow (DCF) model, can help analysts calculate an intrinsic value based on future cash flows. This value is then compared to the actual market value. If the intrinsic value is higher than the market value, the stock is undervalued. If the intrinsic value is lower than the market value, the stock is overvalued.
In addition to intrinsic valuation, analysts like to confirm cash flow valuation with relative comparisons, and these relative comparisons allow the analyst to develop an industry benchmark or average.
The most common valuation measures used in comparable company analysis are enterprise value to sales (EV/S), price to earnings (P/E), price to book (P/B), and price to sales (P/S). If the company's valuation ratio is higher than the peer average, the company is overvalued. If the valuation ratio is lower than the peer average, the company is undervalued. Used together, intrinsic and relative valuation models provide a ballpark measure of valuation that can be used to help analysts gauge the true value of a company.
Valuation and Transaction Metrics Used in Comps
Comps can also be based on transaction multiples. Transactions are recent acquisitions in the same industry. Analysts compare multiples based on the purchase price of the company rather than the stock. If all companies in a particular industry are selling for an average of 1.5 times market value or 10 times earnings, it gives the analyst a way to use the same number to back into the value of a peer company based on these benchmarks.
Human resources departments can have a broad range of responsibilities. Large companies with many employees numbering from dozens to well into the thousands need a human resources department to manage the relationships that employees have with the company. Smaller companies may have only one or two human resources professionals on staff, but the responsibilities remain the same.
Someone needs to oversee the day-to-day details of recruiting and hiring employees, training and developing employees, and making sure the company stays in compliance with employment laws, in addition to other responsibilities. With these different responsibilities come many different job titles.
Recruiting and Hiring
While department heads typically have the final say over who they hire to work in their departments, the task of building a job description, posting it, reviewing resumes, and screening candidates fall on the human resources department. This allows department heads and other managers to keep their focus on their own jobs while human resources seeks potential new hires for openings.
Some of the job titles associated with this type of responsibility might include hiring manager or assistant, recruiter, recruitment manager or specialist, talent acquisition manager or specialist, and other variations on this theme.
Training and Employment Needs
As with the hiring process, department heads and other managers will play a role in training, but the details of developing a training program and overseeing its implementation fall on the human resources department. A responsibility related both to training and to hiring is the assessment of staffing needs. Changes to a company's focus, to the technology it uses, to its budget, or to other factors might result in changes to staffing needs. Human resources works with department heads and other managers to assess these changes and determine if new positions are needed or if current positions need to be redefined or combined with other positions.
Once those changes have been determined, applicable changes to recruitment and training also are made.
Some of the job titles associated with these responsibilities include staff coordinator, human resources analyst, training manager or assistant, or other variations on this theme.
Employee Relations
When employees need assistance with issues that arise with their jobs, human resources is expected to help. This can be anything from a benefits-related question to a conflict with a co-worker, superior, or subordinate.
For example, an employee filing a workers compensation claim would coordinate with the human resources department, which is responsible for handling such claims. As well, if an employee has a complaint about another employee, it is common practice that such complaints be taken up with the human resources department. The hope is that human resources can be objective and find a solution that works for everybody involved.
Relevant job titles in this are of human resources might include employee relations manager, specialist, or assistant, benefits specialist or assistant, or any other variations on this theme.
Performance Reviews
Similar to training, most companies will have a specific protocol for performance reviews. While managers and other supervisors will do the actual assessment of employee performance, the procedure that is followed is developed and overseen by the human relations department. A consistent procedure like this overseen by a separate department keeps the reviews professional and data-driven and helps to avoid favoritism based on subjective criteria.
There often is a lot of overlap between performance reviews and job training, and many of the job titles related to training also apply here.
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Record Keeping and Legal Compliance
Every employee has a personnel file including employment history, pay, benefits, tax documents, past performance reviews, and more. Somebody needs to maintain these files and keep them up to date, and the more employees a company has, the bigger this responsibility. Relative to record keeping is legal compliance. Human resources needs to be sure the company is complying with state, federal, and local laws in everything from monitoring the hours of teenage employees, making sure overtime is paid when required, and much more.
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Job titles associated with these responsibilities might include records manager or assistant, legal adviser, compliance officer, or other titles following a similar theme.
General Responsibilities
Only the largest companies will have human resources departments that are large enough for narrow specialization. Small and even mid-sized companies often will have no more than one or a few staff members handling human resources for the entire company, and that means everyone will need to handle all or most aspects of the job.
In those cases, more general titles are applicable: human resources manager, human resources assistant, human resources administrator, human resources generalist, and many other similar variations.