What is the first step in the comps valuation process?

Narrowing your universe to companies that are similar is indeed the first essential step in the comps valuation process. This step involves selecting a peer group of companies that share similar characteristics such as industry, size, growth potential, and geographical presence. The rationale behind this is that comparable companies will likely face similar market conditions and challenges, allowing for a more accurate assessment of value.

By focusing on similar companies, an analyst can ensure the multiples derived from these companies—such as EV/EBITDA or P/E ratios—are relevant and reflective of the economic and competitive environment the subject company operates within. Without accurately identifying and narrowing down this universe, any subsequent analysis or valuation would lack context and could lead to misleading conclusions. The process of identifying key multiples, applying them, and determining industry standards follows this crucial initial step.