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CFA Level II Exam · Market-Based Valuation: Price and Enterprise Value Multiples

Method of Comparables and Valuation Using Benchmarks

Updated 7 October 2026 · Fact-checked

The method of comparables values a stock by comparing its multiple, such as P/E or EV/EBITDA, with a benchmark: a peer group, an industry, or an index. If the multiple is lower than the benchmark and fundamentals are similar, the stock looks undervalued. You must then check whether fundamentals explain the gap.

Understand Comparables Approach and Valuation Using Benchmarks

Valuation can be absolute or relative. Absolute valuation, such as a discounted cash flow model, estimates intrinsic value from the asset's own forecasts. Relative valuation asks a simpler question: how is the market pricing similar assets, and is this one priced higher or lower?

The method of comparables takes a multiple (P/E, P/B, P/S, EV/EBITDA) for a benchmark and applies it to the subject company. The benchmark can be the average or median of a peer group, an industry, a sector, or a market index. The underlying idea is the law of one price: similar assets should sell for similar prices relative to their earnings, book value, sales or cash flow.

The method of comparables is different from the method based on forecasted fundamentals. Comparables use the market's current pricing as the yardstick and tell you about relative value. Fundamentals-based methods derive a justified multiple from the DDM or free cash flow inputs: growth, required return and payout. They tell you about intrinsic value. If the whole peer group is overpriced, comparables will still call a stock fairly valued. Comparables also assume the market prices the peers correctly on average.

Good peers share business mix, size, growth, risk (including leverage), and accounting policies. Build the peer group, check each multiple is defined the same way, then compute a central value. Use the median when outliers could distort the mean. A harmonic mean is also used for averaging multiples such as P/E to reduce the effect of very high values. Then ask whether differences in growth, risk or returns on capital justify a premium or discount.

The conclusion is always conditional. A stock trading below its peers is only undervalued if its fundamentals are not worse. A lower P/E may reflect slower growth or higher risk. In the exam, the right answer usually explains the gap using the vignette data.

Key formulas to remember

Implied value from a benchmark multiple
Implied price = Benchmark P/E × Subject EPS
Use the same logic for P/B (× book value per share) or P/S (× sales per share). Use the same earnings basis (trailing or forward) as the benchmark.
Implied value using EV multiple
Implied EV = Benchmark EV/EBITDA × Subject EBITDA; Equity value = Implied EV − Net debt (− other claims such as preferred and non-controlling interest)
Divide equity value by shares outstanding for a per-share value.
Relative multiple
Relative P/E = Subject P/E ÷ Benchmark P/E
Above 1 means a premium to the benchmark; below 1 means a discount.
Harmonic mean of multiples
Harmonic mean = n ÷ Σ(1 ÷ multiple)
Equals the reciprocal of the average earnings yield. It is lower than the arithmetic mean when multiples differ.

How to solve Comparables Approach and Valuation Using Benchmarks questions

Use this order for any comparables item set question.

  1. 1Identify the multiple and the benchmark in the vignette: peer group, industry or index.
  2. 2Check comparability: business mix, size, growth, risk, leverage and accounting policies, and whether trailing or forward figures are used.
  3. 3Compute the benchmark value as stated: mean, median or harmonic mean, excluding any firm the question removes.
  4. 4Apply it to the subject's own metric (EPS, book value, EBITDA) to get the implied value, adjusting EV to equity if needed.
  5. 5Compare the implied value or relative multiple with the actual price or multiple, and state over, under or fairly valued relative to the benchmark.
  6. 6Test the conclusion against fundamentals: does higher growth, lower risk or higher ROE justify the premium or discount?
  7. 7Pick the option that states both the numerical result and the correct reasoning.

Quickest way: Premium-or-discount check

When to use it: When the question asks only whether a stock looks cheap or expensive versus peers.

  1. Compute subject multiple ÷ benchmark multiple.
  2. If below 1, flag as a discount; if above 1, a premium.
  3. Scan the vignette for a growth, risk or return difference that explains the gap.
  4. If fundamentals are equal or worse for the discounted stock, do not call it undervalued without caution; if they are equal or better, call it undervalued relative to peers.

Common mistakes in Comparables Approach and Valuation Using Benchmarks

  • Calling a low-multiple stock undervalued without checking fundamentals.

    Candidates treat a cheaper multiple as automatic evidence of mispricing.

    Fix: Always compare growth, risk and returns. A discount is justified if the company is weaker.

  • Treating relative valuation as intrinsic valuation.

    The two terms blur under time pressure.

    Fix: Comparables show value relative to peers only. If the peer group is mispriced, the conclusion is also biased.

  • Mixing trailing and forward multiples or inconsistent earnings definitions.

    The vignette exhibits show several columns and the wrong one gets used.

    Fix: Match the subject metric to the benchmark basis before multiplying.

  • Forgetting to subtract net debt when using EV multiples.

    The implied EV is mistaken for the equity value.

    Fix: Implied EV minus net debt and other claims gives equity value, then divide by shares.

  • Including poor peers or outliers in the benchmark.

    Candidates average everything listed.

    Fix: Remove firms with different business mix or distorted earnings, and use the median where outliers distort the mean.

Worked examples

Example 1

Vignette: Analyst Rao values Norvik Foods using four peers with trailing P/E multiples of 12, 15, 18 and 25. Norvik has EPS of 4.00 and trades at 56. Rao notes that Norvik's growth and risk are similar to the peers. Questions: (1) What is the median peer P/E? (2) What is the implied value per share using the median? (3) What does this suggest about Norvik?

Show the solution
  1. Order the multiples: 12, 15, 18, 25. The median is the average of the middle two: (15 + 18) ÷ 2 = 16.5.
  2. Implied price = 16.5 × 4.00 = 66.00.
  3. Norvik's own P/E = 56 ÷ 4.00 = 14.0, a discount to the median of 16.5.
  4. With similar growth and risk, the price of 56 is below the implied value of 66.

Answer: (1) 16.5. (2) 66.00 per share. (3) Norvik appears undervalued relative to its peers, because fundamentals are similar.

Example 2

Vignette: Tarin Ltd trades at an EV/EBITDA of 9.0. The industry median EV/EBITDA is 11.0. Tarin has EBITDA of 200 million, net debt of 500 million and 50 million shares. Tarin's expected growth is lower than the industry's and its leverage is higher. Questions: (1) What is the implied EV using the industry median? (2) What is the implied value per share? (3) Is the discount to the industry necessarily a sign of undervaluation?

Show the solution
  1. Implied EV = 11.0 × 200 million = 2,200 million.
  2. Equity value = 2,200 − 500 = 1,700 million.
  3. Value per share = 1,700 ÷ 50 = 34.00.
  4. Tarin's growth is lower and leverage higher, which can justify a lower multiple, so the discount may be warranted.

Answer: (1) 2,200 million. (2) 34.00 per share. (3) No. Lower growth and higher leverage may explain the discount, so it does not by itself indicate undervaluation.

Exam tips

  • Read the vignette for the exact benchmark: mean, median, or index. The answer often changes with this choice.
  • When two answer options give the same number, the reasoning decides: pick the one that cites fundamentals.
  • For EV multiples, do the equity bridge before comparing with market price per share.
  • Watch for the contrast between relative value and intrinsic value in conceptual questions; comparables alone cannot say the whole market is overpriced.
  • There is no penalty for wrong answers, so answer every question even if you must guess.

Comparables Approach and Valuation Using Benchmarks in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Comparables Approach and Valuation Using Benchmarks: frequently asked questions

What is the method of comparables in CFA Level II?

It is a relative valuation approach that applies a multiple from a peer group, industry or index to the subject company's earnings, book value, sales or EBITDA. The result is a value relative to the benchmark, not an intrinsic value.

How do I choose comparable companies for valuation?

Pick companies with a similar business mix, size, growth, risk and leverage, and with comparable accounting policies. Check that the multiples are defined on the same basis, and remove outliers that distort the average.

What is the difference between the method of comparables and forecasted fundamentals?

Comparables use how the market currently prices similar assets and give relative value. Forecasted fundamentals use your own growth, payout and required return inputs to derive a justified multiple or intrinsic value.

When should I use the median instead of the mean?

Use the median when a few extreme multiples could distort the mean, since it is less affected by outliers. The vignette usually tells you which measure to use.