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Relative valuation

Abstract

Relative valuation involves the use of similar comparable assets in valuing another asset. Relative valuation is also known as comparable valuation. Price earnings (P/E) ratio is the most commonly used relative valuation measure in industry. In relative valuation, the benchmark might be the multiple of a similar company or the median average value of the multiple for a peer group companies, an economic sector, an equity index or median, or an average own past value of the multiple. Empirical research advocates the use of forward-looking multiples as they are considered to be more accurate predictors of value. The process of relative valuation starts with the selection of a peer group. Peer group selection is based ...

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