Peer selection, scrubbing one-time items, reading the multiple spread

As a junior banker, you've been asked to build a comparable company analysis for a target company. You need to select an appropriate peer set, scrub the peer financials for one-time items that distort the multiples, and then interpret why the peer multiples are spread out rather than clustered around a single value. 1. Task Overview Task: build a defensible peer multiple from a group of comparable companies and use it to estimate the target's enterprise value. Step 1: Given Data — Peer Group and Target Financials You've pulled the following data for five potential peer companies and the target itself. CompanyEnterprise Value ($m)Reported EBITDA ($m)One-Time Item Add-Back ($m) Peer A1,20015010 Peer B9001105 Peer C2,00023020 Peer D500800 Peer E3,50014060 Target—8510 Peer E is currently the subject of takeover speculation reported in the financial press. Step 2: Adjusted EBITDA Show Adjusted EBITDA FormulaAdjusted EBITDA = Reported EBITDA + One-Time Item Add-Back Using this formula, compute Adjusted EBITDA for each peer and for the target. Step 3: EV/EBITDA Multiple Show EV/EBITDA Multiple FormulaEV/EBITDA Multiple = Enterprise Value / Adjusted EBITDA Using this formula, compute the adjusted EV/EBITDA multiple for each peer. Step 4: Selecting the Peer Set and Applying the Multiple Assume: A peer whose multiple is driven by deal speculation rather than operating fundamentals should not be included in the reference range The reference multiple is the median of the remaining peer multiples Using these inputs, compute the target's implied Enterprise Value.

Comparable Company Analysis

📋 What you're given

As a junior banker, you've been asked to build a comparable company analysis for a target company. You need to select an appropriate peer set, scrub the peer financials for one-time items that distort the multiples, and then interpret why the peer multiples are spread out rather than clustered around a single value.

1. Task Overview

Task: build a defensible peer multiple from a group of comparable companies and use it to estimate the target's enterprise value.

Step 1: Given Data — Peer Group and Target Financials

You've pulled the following data for five potential peer companies and the target itself.

Company	Enterprise Value ($m)	Reported EBITDA ($m)	One-Time Item Add-Back ($m)
Peer A	1,200	150	10
Peer B	900	110	5
Peer C	2,000	230	20
Peer D	500	80	0
Peer E	3,500	140	60
Target	—	85	10

Peer E is currently the subject of takeover speculation reported in the financial press.

Step 2: Adjusted EBITDA

Show Adjusted EBITDA Formula

Adjusted EBITDA = Reported EBITDA + One-Time Item Add-Back

Using this formula, compute Adjusted EBITDA for each peer and for the target.

Step 3: EV/EBITDA Multiple

Show EV/EBITDA Multiple Formula

EV/EBITDA Multiple = Enterprise Value / Adjusted EBITDA

Using this formula, compute the adjusted EV/EBITDA multiple for each peer.

Step 4: Selecting the Peer Set and Applying the Multiple

Assume:

A peer whose multiple is driven by deal speculation rather than operating fundamentals should not be included in the reference range
The reference multiple is the median of the remaining peer multiples

Using these inputs, compute the target's implied Enterprise Value.

💡 Model answer

Try answering out loud first — then reveal the model answer and compare.

Step 1: Adjusted EBITDA

Adjusted EBITDA = Reported EBITDA + One-Time Item Add-Back

Company	Reported EBITDA ($m)	Add-Back ($m)	Adjusted EBITDA ($m)
Peer A	150	10	160
Peer B	110	5	115
Peer C	230	20	250
Peer D	80	0	80
Peer E	140	60	200
Target	85	10	95

Adjusted (or "normalized") EBITDA strips out non-recurring items — restructuring charges, litigation settlements, asset write-downs — so the multiple reflects the ongoing, repeatable earnings power of the business rather than a period distorted by a one-off event. This adjustment has to be applied consistently across the whole peer set, not selectively, otherwise the resulting comparison is not apples-to-apples.

Step 2: EV/EBITDA Multiple per Peer

EV/EBITDA Multiple = Enterprise Value / Adjusted EBITDA

Company	EV ($m)	Adjusted EBITDA ($m)	EV/EBITDA
Peer A	1,200	160	7.50x
Peer B	900	115	7.83x
Peer C	2,000	250	8.00x
Peer D	500	80	6.25x
Peer E	3,500	200	17.50x

The EV/EBITDA multiple restates a company's Enterprise Value in terms of a single year of operating cash generation, which makes it possible to compare businesses of very different sizes on a like-for-like basis. Because EV sits above the capital structure, this multiple isn't distorted by differences in leverage or tax rate between peers the way a P/E multiple would be.

Step 3: Reading the Spread and Selecting the Reference Range

Peer E's 17.50x sits far above the rest of the set, which otherwise runs from 6.25x to 8.00x. Given the takeover speculation noted in Step 1, that multiple reflects a control premium priced in by risk arbitrageurs, not the market's view of Peer E's standalone fundamentals — it gets excluded from the reference range.

Sorting the remaining four multiples: 6.25x, 7.50x, 7.83x, 8.00x.

Median = (7.50x + 7.83x) / 2 = 7.67x

The spread itself is informative even after removing the outlier: Peer D's lower multiple may reflect slower growth or thinner margins, while Peer C's premium multiple may reflect the opposite. A tight, credible peer set still shows some dispersion — the analyst's job is to explain why, not to expect a single identical number across all peers.

Step 4: Implied Enterprise Value

Using the target's Adjusted EBITDA (from Step 1) and the peer median multiple (from Step 3):

Implied EV = Adjusted EBITDA × Median Multiple = $95m × 7.67x = $728.7m

This implied EV is a data point rather than a single-point valuation. In practice a banker would present a range — for instance bounded by the 6.25x low and 8.00x high multiples in the peer set — rather than relying on the median alone.

Final Results

Peer Reference Multiple (median, ex-Peer E): 7.67x Adjusted EV/EBITDA
Target Implied Enterprise Value: $728.7m

This implied EV is typically the starting point for a sanity check against a DCF-derived value and, later, the basis for bridging down to an implied equity value and share price.

Would you like to explore how using the full unadjusted (reported) multiples, or excluding Peer D instead of Peer E, would change the implied valuation range?

⚠️ Common mistakes

Averaging all five multiples including the outlier, which pulls the reference multiple far above what the peer group's fundamentals actually support
Adding back one-time items for only some peers, which makes the resulting multiples inconsistent with each other
Confusing EV/EBITDA with a P/E or EV/Sales multiple when applying it to the target
Treating the implied EV as a single precise number rather than a range anchored by the peer spread
Ignoring the qualitative reason (deal speculation, a one-off event) behind why a peer's multiple sits outside the normal range

🔁 Follow-up questions

How would your peer set change if the target operated in an emerging market rather than a developed one? 🔒 sign up free to view
Why not just take the simple average of the five multiples instead of a median? 🔒 sign up free to view
What if Peer D's low multiple was due to genuinely weaker growth prospects rather than being a valid comp? 🔒 sign up free to view