Solving for Similarity Using Company Exposures and Euclidean Distance

Solving for Similarity Using Company Exposures and Euclidean Distance

Comparable Company Analysis (CCA) is a cornerstone of financial analysis. Grouping similar companies is the first step in analyzing relative valuations, performing competitor analysis, and implementing pairs trade strategies. There are several ways to group similar companies. The most used (and most straightforward) methods are sector classification and country (by domicile, exchange market, or headquarter location). However, relying solely on these one-dimensional categories could result in an oversimplification.

For example, Penn National Gaming, Las Vegas Sands Corp, and Wynn Resorts are all U.S. companies operating casinos and casino hotels. However, their geographic revenue exposures are very different, as shown in the table below. Penn National Gaming and Wynn Resorts have more than 50% revenue exposure to the U.S., while Las Vegas Sands and Wynn Resorts have a similar exposure to Macao. It may not be intuitive to determine which one is more comparable to Wynn Resorts.

Company