Question

Discuss the merits and limitations of using the method of comparables as a valuation method.

Answer 1

Solution:

Comparable method of valuation is evaluation process of the performance of the business by comparing with the similar business of the same industry. This is based on the actual data and findings which represents the true comparison analysis of the performance of the business. There are some advantages and disadvantages of this valuation process. The same are discussed below:

The merits of Comparable Valuation Process:

Based on real data: The analysis is made on the basis of the real data and not on the basis of future assumption. It helps to know the actual picture of the comparison of the performance and helps to make various business strategy according with that.

Relatively easy to use: This valuation process is relatively easy to use. The data of the similar industry is easily available and the comparison process of these data are relatively easy and simple.

Easy to understand: The analysis helps the investors to take various economic decisions. This analysis process is easy to understand and the investors can easily interpret the performance of the business and take their decision according with the understanding and the findings of the valuation.

The disadvantages of Comparable Valuation Process:

Misstated data: Sometimes there are not the true company presents in the industry. So the data consider at the time of comparison may be stated wrong results which impacts negatively on the decision taking on the basis of these findings and comparison.

Less Accuracy: For thinly traded stock and volatile company the accuracy level is not at par and it may be lead to the misstatement of the financial statement and financial performance of the business.

References:

Lichfield, N., Kettle, P., & Whitbread, M. (2016). Evaluation in the Planning Process: The Urban and Regional Planning Series (Vol. 10). Elsevier.

Morden, T. (2016). Principles of strategic management. Routledge.