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Public Market Comparable Company Analysis (Trading Comps)
What Are Trading Comps?
Public market comparable company analysis values a target company by applying the trading multiples of similar publicly listed companies. The fundamental premise: similar businesses should trade at similar multiples of earnings, cash flow, or revenue.
- Reflects: Current market sentiment, liquidity premium, real-time pricing information
- Limitation: Market can be mispriced (overvalued or undervalued cycles); pure comps embed market conditions
- Use case: Anchor valuation alongside DCF; critical for IPO pricing, M&A negotiations, and fairness opinions
EV vs. Equity multiples: Use EV-based multiples (EV/EBITDA, EV/Revenue) when comparing companies with different capital structures. Use P/E only for companies with similar leverage profiles.
Key Valuation Multiples
| Multiple | Formula | When to Use | Watch-Out |
|---|---|---|---|
| EV/EBITDA | Enterprise Value ÷ EBITDA | Most widely used; capital-structure neutral | Different D&A policies distort comparability |
| EV/EBIT | Enterprise Value ÷ EBIT | Accounts for D&A differences; better for capex-heavy industries | Affected by non-cash charges |
| EV/Revenue | Enterprise Value ÷ Revenue | High-growth companies with no earnings; early-stage tech | Ignores profitability entirely; wide range of margins |
| P/E | Share Price ÷ EPS | Equity multiple; easy to communicate to non-finance audiences | Distorted by leverage; meaningless if EPS is negative |
| P/Book | Share Price ÷ Book Value/Share | Banks, insurance, financial institutions | Book value may not reflect asset quality |
5-Step Comps Process
- 1Select Comparable Companies — Same industry, similar business model, similar size (revenue/market cap), same geography where possible. Use 6–12 companies. Judgment required — no perfect comps exist.
- 2Gather Financial Data — LTM (last twelve months) and NTM (next twelve months) financials. Sources: Bloomberg, FactSet, S&P Capital IQ, company filings. Normalize for non-recurring items.
- 3Calculate Multiples for Each Comp — EV = Market Cap + Net Debt. Divide by relevant metric (EBITDA, Revenue, EBIT). Compile LTM and NTM multiples for each company.
- 4Select Appropriate Multiple Range — Use median and interquartile range (25th–75th percentile). Exclude outliers. Apply a premium or discount if the target has differentiated characteristics.
- 5Apply to Target and Bridge to Equity Value — Multiply selected range by target's metric → Implied EV range → Subtract net debt → Implied equity value → Divide by shares → Implied price per share.
Valuation Bridge
Implied EV = Comps Multiple × Target Metric (EBITDA / Revenue / etc.)
Equity Value = Implied EV − Net Debt
Price / Share = Equity Value / Fully Diluted Shares
LTM vs. NTM — Timing of Metrics
| Period | Definition | When Preferred |
|---|---|---|
| LTM | Last Twelve Months (trailing actual results) | Stable businesses; when NTM estimates are unreliable |
| NTM | Next Twelve Months (analyst consensus forecast) | Growth companies; markets trade on forward expectations |
| 2-Year Forward | FY+2 consensus estimates | High-growth, pre-profitability companies |
Comps vs. DCF — Key Differences
| Dimension | Trading Comps | DCF |
|---|---|---|
| Basis | Market-based (relative valuation) | Intrinsic value (fundamental) |
| Market conditions embedded | Yes — reflects current sentiment | No — uses your own discount rate |
| Primary input | Comparable company multiples | Cash flow projections + WACC |
| Useful when | Liquid market comps exist | Strong visibility on future cash flows |
| Weakness | Garbage in, garbage out on comps selection | Highly sensitive to terminal value & WACC assumptions |
Best practice: Triangulate — use both comps AND DCF, plus precedent transactions. The overlap of all three ranges is the most defensible valuation zone.
2
Equity Capital Markets (ECM) & IPOs
Global ECM Market Size
| Market | 2024 Volume | Change |
|---|---|---|
| Global Equity Markets (total) | ~$100 trillion | Market cap |
| Global ECM Issuance (2024) | $658.7 billion | — |
| US ECM (2024) | $258.4 billion | +71% year-over-year |
| Global IPO Volume (2024) | $122.7 billion | — |
ECM includes: IPOs, follow-on equity offerings, rights offerings, block trades, convertible bonds (with equity component), and equity-linked instruments.
IPO Process — Four Phases
PHASE 1Company Prep
(weeks 1–4)
(weeks 1–4)
PHASE 2Offering Prep
(weeks 4–8)
(weeks 4–8)
PHASE 3Marketing
(weeks 8–12)
(weeks 8–12)
PHASE 4Placement &
Aftermarket
Aftermarket
| Phase | Key Activities |
|---|---|
| Phase 1: Company Prep | Select underwriters (bookrunners), prepare financials (3yr audited), legal due diligence, corporate governance cleanup, draft prospectus |
| Phase 2: Offering Prep | File preliminary prospectus (red herring), SEC/regulatory review, analyst pre-deal research, determine size and structure (primary vs. secondary shares, greenshoe) |
| Phase 3: Marketing | Management roadshow — 3 teams, 24 cities typically; institutional investor meetings; book-building (collect orders, gauge demand); price range set (non-binding) |
| Phase 4: Placement & Aftermarket | Price set (final); allocations made (priority to long-only institutional investors); trading begins (T+1); underwriters provide stabilization support using greenshoe option |
Timeline: Full IPO = 3–4 months. Accelerated bookbuild (for follow-ons or block trades of listed companies) = 24–72 hours.
Case Study: Visa IPO (2008) — Largest at the Time
| Data Point | Detail |
|---|---|
| Offering price | $44/share — priced above the $37–42 range (strong demand) |
| Gross proceeds (ex-greenshoe) | $17.9 billion |
| Gross proceeds (inc. greenshoe) | $19.7 billion |
| Underwriting spread | 2.8% of gross proceeds |
| Number of banks involved | 45 banks in the syndicate |
| Roadshow scale | 3 simultaneous roadshow teams, 24 cities |
| Market backdrop | Financial crisis — market fell 15% shortly after; IPO still succeeded |
Lesson from Visa: A strong business with clear investor messaging can price successfully even in stressed market conditions. Visa's network economics and defensive characteristics commanded premium pricing above the range despite turmoil.
Greenshoe Option (Over-Allotment)
- Underwriters sell 115% of shares at IPO (15% more than planned)
- If stock trades above offer price → underwriters buy back the overallotment from issuer at offer price → issuer raises 15% more capital
- If stock trades below offer price → underwriters buy shares in open market to support price → stabilize the stock
- Named after Green Shoe Manufacturing, the first company to use it
3
Debt Capital Markets (DCM)
Global DCM Market Size (2024)
| Market | 2024 Volume | Change |
|---|---|---|
| Global DCM Issuance | $8,806.9 billion | +33% year-over-year |
| US DCM | $3,902.9 billion | +41% |
| Canada DCM | $193.9 billion | +17% |
| Top Bookrunner (JPMorgan) | $562.5 billion | — |
DCM is approximately 13× larger than ECM by volume — debt is the dominant financing market globally.
Three Debt Market Alternatives
Bank Market (Loans)
Revolving credit facilities (flexible, draw/repay), term loans (amortizing or bullet). Bilateral (one bank) or syndicated (multiple banks). Maintenance covenants. Relationship-driven. Faster/cheaper than bonds. Typically floating rate.
Private Market (Private Placement)
Direct placement to institutional investors (insurance companies, pension funds). No public registration. Fewer disclosure requirements. Common for mid-market companies. US private placements (USPP) popular in Canada. Fixed rate.
Public Market (Bonds)
Publicly registered debt. SEC filing (prospectus). Investment-grade bonds: tight spreads. High-yield bonds: wider spreads, covenant-lite. Incurrence covenants only. Deepest liquidity. Investors can trade in secondary market.
Choosing Between Markets
Bank loans: flexibility, speed, relationship. Private: no disclosure, medium cost. Public bonds: cheapest cost (IG) or most flexible (HY), highest disclosure burden, largest size achievable.
Investment Grade vs. High Yield Bonds
| Feature | Investment Grade (IG) | High Yield (HY / Junk) |
|---|---|---|
| Rating | BBB- / Baa3 and above | BB+ / Ba1 and below |
| Credit spread | Tight (50–150bps) | Wide (300–700bps+) |
| Covenant package | Light — incurrence only | Heavier — restricted payments, basket mechanics |
| Primary investors | Pension funds, insurance companies | Hedge funds, HY mutual funds |
| Callability | Make-whole + par call | Non-call period (NC3, NC5) then par |
| Typical use | General corporate purposes, refinancing | LBO financing, acquisitions, refinancing bank loans |
4
Hybrid & Combination Capital
Hybrid Capital Instruments
Convertible Bonds
- Debt instrument with an embedded option to convert into equity at a fixed conversion price
- Lower coupon than straight debt (investor accepts less yield in exchange for equity upside)
- Conversion premium: conversion price typically 20–40% above current stock price at issuance
- Dilutive to existing shareholders if converted
- Appeal: Issuer lowers cash interest cost; investor gets downside protection (bond floor) + upside (equity option)
Canadian Preferred Shares — Three Types
- Straight Preferred: Fixed dividend, no maturity date. Like a perpetuity.
- Retractable Preferred: Fixed maturity (typically 5 years); investors can "put" shares back to issuer at par
- Floating Rate Preferred: Dividend resets every 3–6 months based on benchmark rate. Lower duration; preferred in rising rate environments
Preferred dividends are paid after-tax — no deduction for issuer. Ranks above common equity in liquidation but below all debt.
Combination Capital Strategies
| Strategy | Description | When Used |
|---|---|---|
| Dual Track | Company simultaneously prepares for an IPO AND pursues a private sale (M&A). Maximizes competitive tension — best bid wins. | Company wants to explore both options; creates auction dynamic; preserves flexibility |
| Simultaneous Offering | Raise equity and convertible bonds at the same time. Diversifies investor base; achieves different terms on each instrument. | Company needs large capital raise; different investor types want different risk/return |
| Follow-On + Concurrent Convert | Secondary equity offering + convert issuance packaged together. Common in growth company financing. | Minimize equity dilution while raising maximum total capital |
5
Credit Ratings
Rating Agency Framework (DBRS Morningstar)
Credit rating agencies assess the probability of default on a company's debt obligations. Key rating agencies: Moody's, S&P, Fitch, DBRS Morningstar (dominant in Canada).
DBRS Rating Factors
- Core Profitability — Sustainable earnings power, margins, ROCE
- Asset Quality — Quality and diversification of revenue streams, business model durability
- Strategy & Management — Track record, credibility, succession planning
- Balance Sheet Strength — Leverage ratios, debt coverage, liquidity
- Business Strength — Market position, competitive advantages, geographic diversification
Rating Scale (DBRS / S&P)
| Grade | DBRS | S&P | Moody's |
|---|---|---|---|
| IG — Highest | AAA | AAA | Aaa |
| IG — Strong | AA | AA | Aa |
| IG — Good | A | A | A |
| IG — Lowest | BBB | BBB | Baa |
| HY — Speculative | BB | BB | Ba |
| HY — Risky | B | B | B |
| HY — Very Risky | CCC | CCC | Caa |
Agency Problem in Credit Ratings
Structural conflict of interest: Issuers (companies) pay rating agencies for their ratings. This creates incentive for agencies to provide more favourable ratings to retain issuers as clients.
- Pre-2008: Agencies gave AAA ratings to mortgage-backed securities that subsequently defaulted — contributed to the financial crisis
- Reform efforts post-2008: More regulatory oversight (Dodd-Frank, ESMA in Europe), but the issuer-pays model remains
- Investor caveat: Do not rely solely on ratings — conduct independent credit analysis using financial covenants, coverage ratios, and business fundamentals
Exam link: The rating agency conflict of interest is a direct application of the agency problem from Session 1 — management/board vs. shareholder interests. Here it's rating agency vs. investor interests.
Illustrative Credit Ratio Benchmarks by Rating
| Rating | EBIT Coverage | Debt/EBITDA | LTD/Capital |
|---|---|---|---|
| AAA | 21.4× | 0.4× | 13.3% |
| AA | 10.1× | 1.0× | 28.3% |
| A | 6.1× | 1.6× | 33.9% |
| BBB | 3.7× | 2.2× | 42.5% |
| BB | 2.1× | 3.5× | 57.2% |
| B | 0.8× | 5.3× | 69.7% |
The BBB/BB dividing line (investment grade / high yield) is critical: many institutional investors (pension funds, insurance) cannot hold sub-IG paper, creating a large demand cliff at BBB-.
★
Formula Reference — Session 4
Comparable Company Analysis — Key Formulas
Enterprise Value (from market)
EV = Market Cap + Total Debt + Preferred + Minority Interest − Cash
Key Multiples
EV/EBITDA = Enterprise Value / EBITDA (LTM or NTM)
EV/EBIT = Enterprise Value / EBIT
EV/Revenue = Enterprise Value / Revenue
P/E = Share Price / EPS (Earnings Per Share)
Implied Valuation Bridge from Comps
Implied EV = Selected Multiple × Target Metric
Implied Equity = Implied EV − Net Debt
Implied Price = Implied Equity / Diluted Shares
Underwriting Spread (ECM)
Gross Spread = Underwriter Fee / Gross Proceeds
Visa example: $20B IPO × 2.8% spread = ~$560M in underwriting fees
Convertible Bond — Conversion
Conversion Ratio = Face Value / Conversion Price
Conversion Value = Stock Price × Conversion Ratio
Premium = (Conversion Price − Stock Price) / Stock Price
Capital Markets at a Glance
| Market | Size | Primary Instruments |
|---|---|---|
| Global Equity Markets | ~$100 trillion (market cap) | Common shares, preferred |
| Global Bond Markets | ~$120 trillion | Government bonds, corporate bonds, ABS |
| Global ECM (2024) | $658.7 billion | IPOs, follow-ons, converts |
| Global DCM (2024) | $8,806.9 billion | IG bonds, HY bonds, loans |