Stock Market · Fundamental Analysis

Peer comparison

No company exists in isolation. Every valuation must be anchored to what comparable companies trade at. Peer comparison (or 'comps') is how professionals sanity-check valuations.

How peer comparison works

Step 1: define the peer group. Companies in the same industry, similar size, similar business model.

Step 2: calculate key metrics for all peers. P/E, P/B, EV/EBITDA, ROE, ROCE, revenue growth, margins.

Step 3: compare the target company to peers. Is it cheap or expensive relative to peers? If different, is there a justification?

> A 40 P/E pharmaceutical company might look expensive in isolation. But if all comparable pharma companies trade at 50–60 P/E, it's actually the cheapest in the group.

EV/EBITDA. The preferred comparison metric

EV (Enterprise Value) = Market Cap + Total Debt − Cash

EV/EBITDA is better than P/E for comparisons because it's capital-structure neutral. Unaffected by how much debt a company carries. Useful for comparing companies with different debt levels.

EV/EBITDAmost commonly used by investment bankers for M&A valuations

Same-sector, different quality, the discount/premium framework

Two banks in the same industry can trade at P/B 3.5 and P/B 0.8. Same sector, very different valuations. The gap reflects differences in asset quality, ROA, management track record and loan book quality. The cheap one may be a value trap, not a bargain.

The key question

If Company A trades at a premium to peers, can it justify it? Higher growth? Better margins? Stronger moat? If yes, the premium may be warranted. If no, it might be overvalued.

Takeaway. Compare to peers using P/E, P/B, EV/EBITDA, ROE, ROCE simultaneously. A stock is cheap relative to peers, not in absolute terms. Premium valuations must be justified by superior quality.