How are comparable companies or peers identified? A thorough understanding of the products and services that are offered by the company that is being valued is needed. It is important to have a good feel for how it makes money, the focus being on core or recurring business. This information is readily available in the Annual Report or 10-k filings and a company’s website. Keeping this is mind, companies that have similar products and services are identified
Where possible, peers should be short listed keeping size in mind. For example, it is not particularly helpful to compare a company with a billion dollars in revenue to one that has a 100 million topline. Size and scale have a significant imapact on a company’s margins. As a company grows in size, it’s operating enviornment changes. It starts to reap benefits of economies of scale, ease of logistics and a strong distribution channel. All these factors, though not quantifiable, have a significant impact on the revenue and profit generating ability of a company.
Another factor to keep in mind is geography. If the company being valued primarily operates in a developed economy, then where possible only those peers should be identified that have a strong presence in the developed world.