Updated: Jul 17
When performing a valuation analysis using comparable companies, it is essential to make certain adjustments to the financial statements of the comparables to ensure a meaningful comparison. Here are some common adjustments to consider:
Non-Recurring Items: Exclude any one-time or non-recurring items from the financial statements of the comparable companies. These can include extraordinary gains or losses, restructuring charges, or non-operating expenses. By eliminating these items, you can focus on the ongoing operational performance of the companies.
Accounting Policy Consistency: Adjust for any significant differences in accounting policies between the target company and the comparables. This ensures consistency in financial reporting and facilitates a more accurate comparison. For instance, if the target company uses different depreciation methods, make adjustments to reflect the comparable company's method.
Calendarization: Align the financial statements of the comparable companies with the target company's fiscal year. This involves adjusting the comparables' financial data to match the target company's reporting period. Calendarization allows for a more accurate comparison of financial performance and facilitates meaningful analysis.
Seasonal or Cyclical Fluctuations: Smooth out any seasonal or cyclical fluctuations in the financial statements of the comparables. Adjustments can be made to normalize revenues, expenses, or working capital items to reflect average levels. This helps to reveal the underlying trends and performance of the companies.
Non-Operating Income or Expenses: Exclude non-operating income or expenses that are not directly related to the core operations of the comparable companies. Examples include gains or losses from the sale of assets not related to the primary business, interest income, or expenses from unrelated investments. By removing these items, you can focus on the operating performance of the comparables.
Geographic Considerations: Consider any geographic factors that may impact the comparability of financial statements. Adjustments can be made to account for regional differences in economic conditions, tax rates, or industry dynamics. This ensures a more relevant comparison within the target market.
By making these adjustments, you can ensure a more accurate and meaningful comparison between the target company and the comparable companies. Each adjustment should be supported by proper documentation and reasoning to justify its relevance and applicability to the valuation analysis.
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