16.1 Trading Comps and Multiples

Why Trading Comps Matter on the FMVA Final

Comparable Valuation Fundamentals is a 2026 core course. CFI's exam-topic list still names Valuation Techniques (DCF, Multiples, Precedents & Comps) as in-scope. That is the boundary for this chapter. The longer Comparable Company Analysis course is an elective. You need electives for FMVA eligibility, but elective-only peer screens, regressions, and deal-process mechanics are not tested on the final. Do not turn a fundamentals question into a leveraged-buyout or full mergers-and-acquisitions case.

Trading comps (comparable companies analysis) is a relative valuation method. You compare the target's current market value to similar public companies by lining up multiples. CFI's working set is price-to-earnings (P/E), enterprise value to EBITDA (EV/EBITDA), and enterprise value to revenue (EV/Revenue). EV/EBITDA is the most common enterprise multiple.

The relative-value idea is blunt: if close peers trade at 10x earnings, the target should too, after you adjust for differences in growth, margins, size, and risk. You are not claiming the market is perfectly efficient. You are claiming that similar assets should print similar prices per unit of earnings, cash flow, or sales — and that large gaps are a reason to investigate, not a reason to ignore the market.

Trading comps answer a different question than a discounted cash flow (DCF). A DCF asks what the firm's own cash flows are worth if your weighted average cost of capital (WACC), growth, and terminal-value assumptions are right. Comps ask what investors are paying today for similar operations. CFI's professional habit is to run both (and precedent transactions) and read the range. A DCF 40% above every trading multiple is a signal that growth, margin, WACC, or terminal value needs a second look, not a trophy.

Multiples Are Ratios, Not Magic

A valuation multiple is a price in the numerator divided by a metric in the denominator. The two sides must belong to the same claimants.

• Enterprise multiples put enterprise value (EV) on top and an unlevered metric on the bottom: EBITDA, EBIT, or revenue. EV is the value of core operations to all capital providers (Chapter 14: common + preferred + debt + non-controlling interest − cash). EBITDA and EBIT sit above interest, so they match EV.
• Equity multiples put equity value (share price × diluted shares) on top and a levered metric on the bottom: net income (P/E) or book equity (price-to-book). Net income is after interest, so it matches the residual claim.

Mixing the two is the classic error: applying a P/E and reporting the product as enterprise value, or applying EV/EBITDA and dividing by diluted shares without subtracting net debt.

Why EV/EBITDA wins for enterprise work: it is capital-structure-neutral. Two firms with the same operations and different debt loads can still be compared. P/E is applied after leverage — it already contains interest expense, so it is the wrong tool for asking what the business is worth as an enterprise.

EV/Revenue is the fallback when EBITDA is tiny, negative, or not yet meaningful (early-stage or turnaround). It is a blunt instrument: revenue is not cash, and a 5% margin firm should not print the same EV/Revenue as a 25% margin firm. Use it as a cross-check, not as the only multiple, once the target has durable EBITDA.

Peer Selection: Industry, Size, Growth, Margins, Geography

A multiple is only as good as the peer set. CFI's selection filters, which you should be able to recite on the final, are:

1. Industry / business mix — same end markets and cost structure. A specialty-films grower is not a commodity carton converter.
2. Size — similar revenue or EV. Mega-caps often print different multiples than sub-scale names.
3. Growth — expected sales or EBITDA growth. Higher sustainable growth often deserves a higher multiple.
4. Margins — EBITDA or EBIT margin. A 30% margin business is not automatically 12x-comparable to a 12% margin business.
5. Geography — similar country risk, tax, and listing market.

If you cannot defend a name on those five, it does not belong in the mean. Three honest peers beat twelve distant ones. The FMVA final is testing whether you know what makes a peer, not whether you can scrape a 40-name Bloomberg screen — that depth lives in the elective.

Worked Mini Comps Set: Northline Packaging

Continue Northline Packaging from Chapter 14 with a comps snapshot (round teaching figures, not a published CFI table):

• Diluted equity value: $1,200 million (50.0 million diluted shares × $24.00)
• Net debt: $300 million
• EV = $1,500 million
• Last-twelve-months (LTM) revenue: $750 million
• LTM earnings before interest, taxes, depreciation, and amortization (EBITDA): $150 million (20% margin)
• LTM net income: $80 million

Northline's own multiples: EV/Revenue 2.00x, EV/EBITDA 10.0x, P/E 15.0x. Three public peers were chosen as packaging converters. Summit Specialty is the outlier on purpose.

Mean Versus Median Trap

Peer EV/EBITDA of 12.0x, 9.0x, and 21.0x:

• Mean = (12.0 + 9.0 + 21.0) / 3 = 14.0x
• Median (middle once sorted 9.0, 12.0, 21.0) = 12.0x

Apply those statistics to Northline's $150 million of EBITDA:

• Median: 12.0 × 150 = $1,800 million of implied EV
• Mean: 14.0 × 150 = $2,100 million of implied EV

The $300 million gap is Summit, not a modeling insight. Summit is larger, trades on a specialty-films growth story, and prints a 3.00x revenue multiple against 1.80x–2.40x for the true converters. On the exam, prefer the median when the set is small and one name is off-cloud. Dropping Summit altogether leaves 9.0x and 12.0x, mean and median both 10.5x, implied EV $1,575 million — much closer to Northline's current $1,500 million.

P/E tells the same story: mean 19.0x, median 15.0x. Median P/E × $80 million of net income = $1,200 million of equity, which matches the market. Mean P/E × 80 = $1,520 million of equity — again Summit talking.

Normalize Before You Multiply

Normalize means strip one-time items so the denominator is run-rate earnings. Suppose Northline's LTM EBITDA of $150 million is after a $15 million litigation settlement charged in selling, general, and administrative expense. That cash is not a repeating operating cost.

Adjusted EBITDA = 150 + 15 = $165 million.

At the 12.0x median: 12.0 × 165 = $1,980 million implied EV — $180 million above the unadjusted 12.0x case. Failing to add back the settlement understates value. The opposite error is worse: adding back a recurring "restructuring" charge that hits every year.

Summit's 21.0x may itself be dirty. If Summit booked a $50 million one-time gain inside EBITDA, true EBITDA is $150 million and the multiple is 4,200 / 150 = 28.0x — even less of a peer.

Normalization rules you can defend on the final:

• Add back truly one-time losses (settlements, disaster repairs, discontinued operations) and subtract one-time gains (asset sales, insurance recoveries).
• Keep run-rate compensation, ordinary warranty costs, and depreciation policy.
• Use the same period for every name: LTM or a forward year, not a mix of last year on the target and next year on the peers.
• Calendarize if fiscal year-ends differ. Fundamentals: know that you should. Do not invent a 13-period elective worksheet on the 50-question exam.

Leverage: Why EV Multiples and P/E Are Not Interchangeable

Take two firms with identical $100 million of EBITDA and identical $1,200 million of EV (12.0x). Depreciation and amortization is $20 million, so EBIT is $80 million. The tax rate is 25%.

EV/EBITDA is the same because the operations and the enterprise value are the same. P/E moved because interest reduced net income and because equity is only the residual. If you applied the unlevered peer's 20.0x P/E to the levered peer's $33 million of net income, you would imply $660 million of equity — not the $600 million the EV identity already gave you.

That is why CFI applies EV multiples for capital-structure-neutral comparison and uses equity multiples (P/E) after leverage is already in the financials. Implied equity = implied EV − net debt (− preferred − NCI) + non-core cash. For Northline at 12.0x × $150 million = $1,800 million of EV: equity = 1,800 − 300 = $1,500 million, or $30.00 per diluted share versus the $24.00 market. That is a view, not a fact, until you read it against the DCF and against precedents in the next section.

Exam Traps for Section 16.1

• Treating Comparable Valuation Fundamentals as out of scope because a longer comps elective exists.
• Applying P/E × EBITDA, or reporting EV/EBITDA × EBITDA as a share price without the equity bridge.
• Using basic shares in P/E when options are in the money.
• Taking the mean of a set that includes an obvious outlier.
• Skipping normalization of one-time items.
• Comparing a forward multiple on the peer to an LTM metric on the target.
• Forgetting that NCI in EV must match consolidated EBITDA.