Comparison of price per unit of sales to illustrate how a business priced is called valuation using comparables model.
Purpose of the model is as follows:
• Predicting market price of a business with the help of similar line of business.
• If the analysts have very strong idea about the profitability of business within their industry they can rely on the accuracy of the price.
• This is one of the reliable and widely used methods. We can calculate all requirements of comparable method with the help of balance sheet and income statement.
• In this valuation model we mainly used Price to earning ration, enterprise value to sale ratio, enterprise value to earnings before interest, taxes, depreciation & amortization ratio and EBITDA to sales ratio.
• For finding market value of the firm, we multiply P/E ratio of the similar company in the industry to firm’s earning.
P/E ratio denotes price earnings ratio.