What is a comparable company analysis (comps)?

A comparable company analysis (comps) is indeed a valuation method that focuses on comparing financial metrics of similar companies within the same industry. This approach enables analysts to derive relative valuations based on metrics such as earnings, sales, and other performance indicators. By examining how similar companies are valued in the market, one can make informed estimates about the value of a target company.

This method is particularly useful for assessing a company's worth based on how the market values its peers, providing a benchmark that helps investors understand whether the target company may be under- or over-valued. Comparisons can be structured around different valuation multiples, such as Price-to-Earnings (P/E) or Enterprise Value-to-EBITDA (EV/EBITDA), reflecting the financial health and positioning of the companies under consideration.

The other choices refer to different financial analysis aspects but do not accurately define comparable company analysis. For instance, determining stock buy or sell recommendations is more aligned with investment strategy rather than a direct valuation method. Evaluating a company's financial performance over time is more about historical analysis, while assessing investment risks and returns encompasses a broader spectrum of financial assessments that go beyond just comparables.