Definition
Relative valuation compares a company's valuation ratios to industry peers, sector averages, or its own historical range. Unlike DCF (absolute valuation), it relies on market pricing of comparable assets. It's faster but assumes the market prices comparables correctly.
Formula
Example
If sector median P/E is 18x and your stock trades at 12x with similar growth, it may be relatively undervalued. However, verify there's no fundamental reason for the discount.
FAQ
What is Relative Valuation?
Valuing a company by comparing its multiples to peers or historical averages.
How do you calculate Relative Valuation?
A common formula for Relative Valuation is: Various: Compare P/E, EV/EBITDA, P/S, etc. to peer medians
Why is Relative Valuation important?
Relative Valuation helps investors evaluate valuation and make more informed decisions.
Related Terms
Comparable Company Analysis (Comps)
Valuation method comparing a company to similar publicly traded peers.
Absolute Valuation
Valuing a company based solely on its fundamentals without peer comparison.
P/E Ratio (Price-to-Earnings)
A valuation ratio comparing a company's stock price to its earnings per share.