In a multiples analysis, what type of companies are compared?

In a multiples analysis, the focus is on comparing companies that operate within the same industry and have similar sizes. This approach is critical because it allows for a more accurate valuation by considering companies that face similar market conditions, competitive dynamics, and growth prospects.

When companies are compared within the same industry, the multiples derived from these companies—such as Price-to-Earnings (P/E) ratios or Enterprise Value-to-EBITDA (EV/EBITDA)—provide a benchmark that reflects relevant market behaviors and performance metrics. Similar sizes ensure that the comparisons are valid, as larger companies may benefit from economies of scale or market dominance that smaller firms do not experience.

In contrast, examining companies of various sizes in different industries would potentially lead to misleading conclusions, as their financial metrics and external factors can vary significantly. Similarly, comparing companies solely based on revenue levels may overlook critical aspects of their operational efficiencies or growth potential, while the dynamics between startups and established firms differ vastly, making direct comparison impractical in most analytical scenarios.