Chapter 19 - Case valuation study

Question 1

What is the purpose of valuation using comparables?

Answer 1

Comparables is used to avoid blind eyed acquisitions. We want to understand how the firm is positioned vs its competitors, which is the other firms in the same industry. If this specific firm has a much higher P/E than its competitors, this will serve as a great indicator that this firm is over priced.

However, the metric from the comparables are not bullet proof, and serve only as indicators.

The goal is to understand whether this equity is cheap or not.