Definition
Relative valuation uses market-based multiples (P/E, EV/EBITDA, P/B, P/S) to value a company against peers. The premise is that similar companies should trade at similar multiples, with deviations explained by growth, profitability, or risk differences. It is faster and simpler than DCF but depends on the market pricing peers correctly.
lightbulb Example
Five peer companies trade at median 12x forward P/E. Target company has above-average growth (20% vs 15% peer median), justifying a premium. Applying 14x to expected EPS of $4 gives fair value of $56.
verified_user Key Points
- Faster and simpler than intrinsic valuation
- Assumes market prices peers correctly
- Must adjust for growth, margin, and risk differences
- Combines with DCF for comprehensive valuation