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Stocks V: Relative valuation

Einstein taught us that everything is relative. Perhaps that’s one of the reasons why analysts use tools of relative valuation so widely. This type of analysis, based on ratios usually referred to as multiples, is often misinterpreted as being a simple comparison between two numbers. But far from that being the case, relative valuation can be just as complicated as DCF valuation. Read on and you’ll see why.

Definition and issues

Relative valuation tools assess the value of a company relative to a benchmark. Implementation of these tools involves three steps: First, comparing a ratio ...

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