8
Relative valuation
What topics are covered in this chapter?
- Why use relative valuations?
- Price/earnings (P/E) ratio
- P/E relative
- Peg ratio
- Yield – investing for income
- Enterprise value (EV)
- EV/EBITDA
- EV/operating free cash flow
- EV/sales
- Price to book
- Summary
- Checklist
Why use relative valuations?
We have seen the process in arriving at an absolute valuation for a company. By forecasting its long-term cash flows, assessing the risk profile to generate an appropriate discount rate and assuming a growth rate in the future we arrive at the ‘intrinsic’ value of the shares.
Clearly this can be quite a complex procedure. Furthermore, we are giving most of the weight of the valuation to the distant future when our confidence around trends and numbers ...
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