Evaluating comparable company valuation - how to derive at the right multiple

Abstract: Company valuation is entering a new era; with increasing demands, more awareness and internal resistance. As the companies who request the valuation, together with third parties, begin to show more interest in the value statements - the analyst must be able to validate his course of action with reliable reasoning based on substantiated data. In this thesis, two approaches to the Comparable Company Valuation method will be evaluated and analyzed with the use of a Case Study. Initially, the two approaches will be applied on a Target Company, Company X, which will result in two value estimations. In order to draw conclusions of how to derive a correct valuation and what approach that is to be preferred in the given scenario, similar valuations were performed on six additional companies, in the same manner as the Case Study, and compared with their respective real market value. The valuation is based on financial data and all companies used in the study are listed on Nasdaq Stockholm Stock Exchange. Findings – First and foremost, results showed that a Comparable Company Valuation is very dependent on its composed peer group. Results from the study indicated increasingly favorable outcomes, when the peer group was similar to the Target Company. The prime conclusions are that, with a perfectly composed peer group, in a mature industry, one of the approaches was to be preferred. However, in an immature industry, where the requirements of the companies used in the composed peer group have to be broadened, the latter approach indicated favorable outcome. Originality - This study is one of the first to compare two different approaches to the Comparable Company Valuation method and analyze in what scenarios one approach is to be preferred to the other.