Comparable companies analysis ("comps") is the most frequently used valuation methodology in practice, and interviewers test it correspondingly often. The mechanics are simple to memorise; the judgement calls — which companies belong in the set, which multiple to use, and why — are where candidates actually get separated.
"Walk me through how you'd build a comps set"
Identify a set of publicly traded companies similar to the target on the dimensions that actually drive valuation: business model, sector, growth profile, margin profile, size, and geography. Pull each comp's enterprise value and equity value, calculate relevant multiples (EV/EBITDA, EV/Revenue, P/E), and apply the resulting range to the target's own financials to imply a valuation range.
"How many comps is the right number?"
There is no fixed answer interviewers expect verbatim, but the reasoning matters: too few comps (2-3) makes the range unreliable and vulnerable to one outlier; too many (15+) usually means the set has drifted away from true comparability just to hit a number. Most practitioners target somewhere in the 5-10 range of genuinely comparable businesses, favouring quality of comparability over quantity.
"Why EV/EBITDA instead of P/E?"
- EV/EBITDA is capital-structure-neutral — it compares operating performance regardless of how much debt each company carries, which matters because comps often have very different leverage.
- P/E is capital-structure-dependent (net income already reflects interest expense) and is distorted by differences in tax rates, one-off items, and non-operating gains/losses across companies.
- EV/EBITDA is typically preferred for comparing operating businesses broadly; P/E remains standard in sectors like banks and insurers, where EBITDA is not a meaningful metric and net income/book value-based multiples are the norm instead.
The outlier and asymmetry follow-ups
- "What do you do if one comp is trading at a much higher multiple than the rest?" — investigate why before excluding or keeping it: a genuine quality premium (higher growth, higher margins) justifies keeping it and noting the premium; a temporary distortion (takeover speculation, a one-off earnings beat) is grounds to exclude it or flag it as an outlier in the range.
- "Would you weight the comps equally?" — not necessarily; the comps closest to the target on growth, margin and size should be weighted more heavily in judgement, even if the arithmetic average treats them equally.
- "How is comps different from precedent transactions?" — comps use current trading multiples of public peers (no control premium); precedent transactions use multiples actually paid in historical M&A deals, which embed a control premium and therefore usually imply a higher valuation range than trading comps.
The trap most candidates fall into
Treating comp selection as a mechanical screen (same sector, done) rather than a judgement call. Interviewers probe specifically for whether you can defend why a given company belongs or doesn't belong in the set — that defence is the actual skill being tested, not the multiple formula itself.
Frequently asked questions
Why is EV/EBITDA generally preferred over P/E in comps analysis?
EV/EBITDA is capital-structure-neutral and unaffected by differences in tax rates or one-off items, making it more comparable across companies with different leverage and accounting profiles. P/E remains standard for banks and insurers where EBITDA is not meaningful.
How many companies should be in a comps set?
There is no universally correct number, but most practitioners favour roughly 5-10 genuinely comparable companies over either too few (unreliable range) or too many (comparability has drifted just to hit a target count).
What is the difference between comps and precedent transactions?
Comps use current trading multiples of public peer companies with no control premium. Precedent transactions use multiples actually paid in historical M&A deals, which embed a control premium and typically imply a higher valuation range.
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