Comparing companies within a sector
Build a clean peer group, make figures comparable, and use peer multiples together with growth, margins and debt to judge relative value.
What you will learn
- How to select a peer group that is really comparable
- How to make figures comparable: calendarisation and one-off items
- How to read peer multiples together with growth, margin and debt
- How to derive a value range from a peer median, and its limits
Explanation
The definitions of P/E, EV/EBITDA and other multiples are covered in the course on stocks (lesson "Valuation multiples"). This lesson is about applying them to a group of competitors fairly.
Step 1: choose the peer group
A peer group is a set of companies with similar business models, customers, risks and growth drivers. The same GICS sub-industry is a starting point, not the answer. Check:
- Revenue mix: a company may be classified as industrial but earn half its profit from software.
- Geography: exposure to different economies and currencies.
- Size and position in the cycle: very small companies often trade at different multiples.
- Accounting standard: IFRS (used by listed EU companies) and US GAAP can treat items such as leases differently, which changes EBITDA.
Four to eight good peers are better than twenty loose ones.
Step 2: make the numbers comparable
Calendarisation converts figures for different financial years to the same calendar period. If a company's financial year ends in March, calendar-year 2026 EBITDA is roughly 3 months of the year to March 2026 plus 9 months of the year to March 2027: 0.25 × FY Mar-26 + 0.75 × FY Mar-27.
Adjusted figures remove one-off items such as restructuring costs, asset sales or legal settlements. Be careful: companies define "adjusted" themselves. If restructuring costs appear every year, they are not one-off; add them back into your own figures.
Use the same basis for every peer: either all historical or all forecast figures, and the same source.
Step 3: read multiples with fundamentals
A low multiple is not automatically cheap. Higher multiples are usually paid for higher growth, higher and more stable margins, higher returns on capital and lower debt. Put these columns next to the multiple. A simple check is to rank each company on each criterion and see whether the ranking of multiples matches the ranking of quality. Large differences that you cannot explain are worth investigating.
Some ratios combine both, for example EV/EBITDA divided by expected growth. Use them only as a rough screen: they break down for very low or negative growth.
Step 4: derive a range
Apply the peer median (the middle value, less distorted by extremes than the average) and the range between the second-lowest and second-highest peer to the target company. With EV multiples, subtract net debt to get the equity value. The result is a range of what the market pays for similar companies today. It is not an intrinsic value: if the whole sector is overvalued, the target looks "fair" too.
Worked example
Hypothetical example: four listed packaging companies, forecast figures for the same calendar year, all reported under IFRS. Figures in € millions.
| Company | EV | EBITDA | EV/EBITDA | Sales growth | EBITDA margin | Net debt / EBITDA |
|---|---|---|---|---|---|---|
| A | 12,000 | 1,000 | 12.0x | 4% | 20% | 1.0x |
| B | 9,000 | 1,000 | 9.0x | 2% | 15% | 3.0x |
| C | 18,000 | 1,200 | 15.0x | 9% | 24% | 0.5x |
| D | 7,000 | 700 | 10.0x | 3% | 18% | 2.0x |
- Multiples: A 12,000 ÷ 1,000 = 12.0x; B 9.0x; C 15.0x; D 10.0x.
- Sorted: 9.0, 10.0, 12.0, 15.0. Median = (10.0 + 12.0) ÷ 2 = 11.0x.
- Quality ranking: C has the highest growth, highest margin and lowest debt; B is last on all three. The multiple ranking (C, A, D, B) matches the quality ranking exactly.
Conclusion: B is the "cheapest" but also the weakest and most indebted. Nothing here suggests a mispricing; the market pays for quality consistently.
Common mistake
Practice activity
Hypothetical target company E (also packaging) has forecast EBITDA of €500m for the same calendar year as the peer table, net debt of €1,000m and 100 million shares. Its financial year ends in March: EBITDA for the year to March 2026 was €400m and the forecast for the year to March 2027 is €460m. On paper: (a) calendarise E's 2026 EBITDA; (b) using the €500m peer-year forecast, apply the peer median of 11.0x and the range 10.0x–12.0x to estimate the value per share.
Show solution
(a) Calendar 2026 EBITDA = 0.25 × €400m + 0.75 × €460m = €100m + €345m = €445m.
(b) At 11.0x: EV = €500m × 11.0 = €5,500m; equity = €5,500m − €1,000m = €4,500m; per share = €4,500m ÷ 100m = €45.
At 10.0x: EV €5,000m, equity €4,000m, €40 per share. At 12.0x: EV €6,000m, equity €5,000m, €50 per share. Range: about €40–€50 per share.
Note that a 1-point change in the multiple moves the value per share by €5, or about 11%. Always apply a multiple to EBITDA for the same period as the peers' EBITDA; that is why calendarisation in (a) matters.
Limitations: the range reflects today's sector valuation, not intrinsic value; minority interests, pensions and leases are ignored here.
Key takeaways
- A good peer group is built on business model and risks, not only on classification.
- Calendarise and adjust figures consistently for every peer.
- Read multiples next to growth, margins and debt before calling anything cheap.
- Peer multiples give a relative value range, which depends on the valuation of the whole sector.
Next step
In the final lesson you will combine everything from this course into a structured sector overview report.
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