Method of comparables

Valuing a share by the multiple at which similar firms trade, such as a peer median P/E. It says whether the share is cheap against its peers, not whether the peers are fairly priced.

Where you will meet it

Method of comparables appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Tell apart valuation by comparables and valuation by forecasted fundamentals
  CFA Level I · Equity Investments

  “The method of comparables prices a share against what the market pays for similar firms, using a multiple such as a peer median P/E, and so answers whether it is cheap or dear relative to those peers; if the whole group is mispriced, the answer inherits the error.”

• Contrast comparables with forecasted fundamentals as ways of applying price multiples when valuing, and set out the economic logic behind each
  CFA Level II · Equities

  “The method of comparables values a share relative to similar companies: if it trades on a lower multiple than its peers, it may be undervalued.”

• Assess a stock with comparables and explain why fundamentals matter when applying that method
  CFA Level II · Equities

  “The method of comparables follows a sequence: choose comparable companies, usually in the same industry and similar in size, growth and risk; calculate their multiples and a central value; compare the subject company's multiple with it; and examine whether differences in fundamentals explain any gap.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with M · Glossary