How Does Comparable Company Analysis Excel Walkthrough | Valuation Multiples Work?

Imagine you're trying to figure out how much your favorite toy is worth by looking at how much other similar toys cost, that's what comparable company analysis does, but for grown-up companies instead of toys.

Let’s say you want to know if your friend’s new robot toy is worth buying. You look around the toy store and see other robots that are similar, some cost $20, others $30. Since they’re all robots, you can guess your friend's robot might be somewhere in between.

That’s valuation multiples, a way to compare companies by looking at how much people pay for similar ones. If one company sells for 10 times its earnings, and another sells for 12 times its earnings, we use that number (called a multiple) to guess the price of a new company.

Let’s say Company A makes $1 million in profit every year and is worth $10 million, that means it's priced at 10 times its earnings. If another similar company has the same kind of profits, we might think it should also be worth around 10 times its earnings.

So instead of magic, we use a little math and comparison to figure out what something is worth, just like you do when choosing between robot toys!