Comps
The term “comps”, or comparables, is usually referred to in the financial sector as a collation of financial condition and other points of a company's stability factors.
In the retail sector, this term is commonly used to describe sales comparison between similar shops or same-store sales but in different time periods. When conducting a financial analysis, comps is utilized in terms of evaluation of a company’s performance on the market and comparison of certain criteria with competitors. In the real estate sphere it is used to estimate the value of a property comparing it to similar ones.
Comps in retail sector
As stated above, comps are widely used in retail for company performance among other companies measurement. This system is mostly implemented by investors and analysts. It reflects the sales size and helps to understand the factors influencing the store's success.
According to the duration of being opened, stores are normally divided into two main groups: those that have been opened for less than a year and the stores that have been operating for more than a year. This factor is important to mention as recently opened shops attract much more customers due to several circumstances. As a rule, newly opened stores run promotion campaigns as well as grand openings. All the factors brought up above increase customers’ attraction to the store. That is why you cannot get clear results when comparing figures of a shop that has been operating for a while to the not long ago opened ones.
Comps method is beneficial when comparing results of stores that have been opened for more than a year as in this case it displays real growth of the chain or a company.
Retail sales Comps. The subtraction of the previous year's sales from the current year's sales divided by the sales amount of the previous year will show the growth of the company’s sales. These calculations provide investors with proper information about a company's financial condition and help company owners to understand which stores operate most effectively.
Comps in business valuation
When valuing a company, investors normally use data about the company's market capitalization (enterprise value (EV), comparing it to sales data they can get from such indicators as EBITDA or EPS.
Comps are used in order to find out the fair market value of a company. These data serve as a reference point to establish the real value of the company under analysis in case of acquisition or purchase.
Advantages of using this method are:
- Reliable information about similar companies gives access to accurate results.
- This approach reflects the state of the whole market, as it is based on the analysis of similar companies.
- The price of the business indicates its’ financial performance.
Disadvantages of the comps are the following:
- Development prospects are not taken into account.
- Sometimes it is quite difficult to collect reliable information.
- It constantly requires companies to make changes, since even peer enterprises differ from each other in assortment, equipment, quality of management, and development strategy.
Comps in real estate
The essence of the market approach to estimating the value of real estate consists in forming a conclusion about the market value of the object on the basis of processing data about the prices of transactions (sale or lease) with the objects similar to the object of evaluation by a set of pricing factors. It is meant that the concept of market value essentially coincides with the concept of equilibrium price which is a function only of quantitative characteristics of an exhaustively complete set of pricing factors determining supply and demand for comparison objects.
