# Comparable Company Analysis- CCA

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## Definition: Comparable Company Analysis- CCA

Comparable company analysis is a strategic process used to evaluate a company by comparing the operating multiples and equity multiples with those of other business which are of the same size, in the same industry. CCA has application in M&A, restructuring, IPOs and FPOs and share repurchases.

Operating multiples- Sales revenue, ROE, Profit margins, Enterprise Value/Sales, Enterprise Value/EBITDA

Equity multiples- Price/Earnings, Price/Book, Price/Sales

Process for doing CCA:

 Advantages Disadvantages Easy to calculate and communicate to market participants Estimates are derived from market value rather than assumptions Determines a benchmark value for multiples used in valuation Influenced by market conditions Not useful when there are a few or no comparable companies Difficulty in finding appropriate comparable companies

Example:

1) A company O has an estimated EPS of \$0.80 in 2016. How much is the stock worth in 2016?

First we need to do CCA for the 5 comparable companies

The CCA shows that companies are trading at 13.2(median) according to 2016E P/E ratio

Market price of share = 13.2 * \$0.80 = \$10.56

Hence the stock is worth \$10.56 in 2016

2) Company O has an estimated EBITDA of \$163.68(million) in 2016. How much is the stock worth?

The CCA shows that companies are trading at 4.3(median) according to 2016E EV/EBITDA ratio

Enterprise Value (in 2016) = 4.3 * \$163.68 million = \$703.84 million

(EV = Market Cap + Net Debt)

Net Debt = (EV – Market Cap), which was (589.25 – 461.25) = \$128 million

Hence Net Debt in 2015 was \$128 million

Market Cap (in 2016) = \$703.84 million - \$128 million = \$575.824 million

Market price of share = Market Cap/ Outstanding shares

= (\$575.824 million/45 million) = \$12.796

Hence, this concludes the definition of Comparable Company Analysis- CCA along with its overview.

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