{"id":4780,"date":"2022-07-26T06:45:36","date_gmt":"2022-07-26T06:45:36","guid":{"rendered":"https:\/\/rakshithpai.com\/?p=4780"},"modified":"2022-10-20T16:44:48","modified_gmt":"2022-10-20T16:44:48","slug":"relative-price-valuation","status":"publish","type":"post","link":"https:\/\/rakshithpai.com\/relative-price-valuation\/","title":{"rendered":"Relative Valuation Model &#8211; Features, Types, Pros &#038; Cons explained:"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-662d57abc8ae3\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\" style='display:none' id=\"ez-toc-cssicon-toggle-item-662d57abc8ae3\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#What_Is_a_Relative_Valuation_Model\" title=\"What Is a Relative Valuation Model?\">What Is a Relative Valuation Model?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#How_to_do_Relative_Valuation\" title=\"How to do Relative Valuation?\">How to do Relative Valuation?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Identify_Peer_Companies\" title=\"Identify Peer Companies\">Identify Peer Companies<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Ratio_Analysis\" title=\"Ratio Analysis\">Ratio Analysis<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Price_to_Earnings_PE_ratio\" title=\"Price to Earnings (P\/E) ratio\">Price to Earnings (P\/E) ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Price_to_Earnings_Growth_PEG_ratio\" title=\"Price to Earnings Growth (PEG) ratio\">Price to Earnings Growth (PEG) ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Price_to_Book_PB_ratio\" title=\"Price to Book (P\/B) ratio\">Price to Book (P\/B) ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Enterprise_Value_to_Earnings_before_interests_and_taxes_EVEBITDA_ratio\" title=\"Enterprise Value to Earnings before interests and taxes (EV\/EBITDA) ratio\">Enterprise Value to Earnings before interests and taxes (EV\/EBITDA) ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Price_to_Sales_PS_ratio\" title=\"Price to Sales (P\/S) ratio\">Price to Sales (P\/S) ratio<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Price_to_Cash_flows_PCF_ratio\" title=\"Price to Cash flows (P\/CF) ratio\">Price to Cash flows (P\/CF) ratio<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Time_Period\" title=\"Time Period&nbsp;\">Time Period&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Data_Analysis\" title=\"Data Analysis\">Data Analysis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Intrinsic_valuation\" title=\"Intrinsic valuation\">Intrinsic valuation<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Pros_of_Relative_Valuations\" title=\"Pros of Relative Valuations:\">Pros of Relative Valuations:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Cons_of_Relative_Valuations\" title=\"Cons of Relative Valuations:\">Cons of Relative Valuations:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Types_of_Relative_Valuation_Models\" title=\"Types of Relative Valuation Models:\">Types of Relative Valuation Models:<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Comparable_Company_Analysis\" title=\"Comparable Company Analysis\">Comparable Company Analysis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Precedent_Transaction_Analysis\" title=\"Precedent Transaction Analysis\">Precedent Transaction Analysis<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Relative_Valuation_Model_vs_Absolute_Valuation_Model\" title=\"Relative Valuation Model vs. Absolute Valuation Model:\">Relative Valuation Model vs. Absolute Valuation Model:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Relative_Valuation_Model_vs_Intrinsic_Valuation_Model\" title=\"Relative Valuation Model vs. Intrinsic Valuation Model:\">Relative Valuation Model vs. Intrinsic Valuation Model:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-21\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Conclusion\" title=\"Conclusion:\">Conclusion:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-22\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#FAQs\" title=\"FAQs:\">FAQs:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-23\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#For_More_Information_Watch_YouTube_Video\" title=\"For More Information, Watch YouTube Video:\">For More Information, Watch YouTube Video:<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-24\" href=\"https:\/\/rakshithpai.com\/relative-price-valuation\/#Also_read\" title=\"Also read: \">Also read: <\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_Is_a_Relative_Valuation_Model\"><\/span><strong>What Is a Relative Valuation Model?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>A company&#8217;s worth can be estimated using a relative valuation model by comparing it to the worth of other companies in the same industry. <\/strong>Absolute value models try to calculate a company&#8217;s value by discounting its expected future free cash flows to the present, with no consideration of how similar or unlike those cash flows could be to those of other companies. Like absolute value models, relative valuation models can help investors decide if a company&#8217;s stock is worth purchasing.<\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-1 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p>By comparing it to other companies in the same industry and by the same criterion, relative valuation attempts to determine a company&#8217;s worth. The method depends on the market&#8217;s accurate assessment of comparable companies&#8217; worth. One of the best ways to determine if a company&#8217;s stock price is fair is to compare it to similar companies.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_do_Relative_Valuation\"><\/span><strong>How to do Relative Valuation?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Relative valuation as the word suggests is to value one company by comparing it to its peers. So, the following are 5 steps you need to do to compare:<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Identify_Peer_Companies\"><\/span><strong>Identify Peer Companies<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>In order to compare the peer company&#8217;s financials, you must know what is the company&#8217;s business objective and then see for similar companies with the same business objectives.<\/p>\n\n\n\n<p><strong>It is suggested to see for companies that are of similar size in market capitalization, with the same location of the business, similar capital structure, serve similar market base (domestic, international, or both), and such others for similarities.&nbsp;<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Ratio_Analysis\"><\/span><strong>Ratio Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>When it comes to Financial Analysis, analyzing the ratio of both the comparable companies is the best choice.<\/strong> Being in the same industry with similar financial figures, ratio analysis is the best choice to arrive at the decision of which company is the better choice for investment.<\/p>\n\n\n\n<p><strong>Following are the key ratios to consider:<\/strong><\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Price_to_Earnings_PE_ratio\"><\/span><strong>Price to Earnings (P\/E) ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>The price-earnings ratio (P\/E ratio, P\/E, or PER) compares the current market price of a share to the company&#8217;s per-share earnings. <\/strong>Companies can be evaluated for their fair market worth using this ratio.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"ast-oembed-container \" style=\"height: 100%;\"><iframe loading=\"lazy\" title=\"What is the Price to Earnings (P\/E) ratio? How to Value a Company based on the #peratio #shorts\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/fnFWSyK2cCg?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Price_to_Earnings_Growth_PEG_ratio\"><\/span><strong>Price to Earnings Growth (PEG) ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>The PEG ratio is a valuation statistic used to examine the relationship between a stock&#8217;s price, its earnings per share, and the growth prospects of the underlying business. <\/strong>A higher growth rate usually results in a higher P\/E ratio.<\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-2 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Price_to_Book_PB_ratio\"><\/span><strong>Price to Book (P\/B) ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>The price-to-book ratio (P\/B ratio) is a financial measure used to evaluate the market value of a firm relative to its book value as of a specific date.<\/strong> Value per share is determined by dividing the stock price by the book value of the company&#8217;s shares (BVPS).<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Enterprise_Value_to_Earnings_before_interests_and_taxes_EVEBITDA_ratio\"><\/span><strong>Enterprise Value to Earnings before interests and taxes (EV\/EBITDA) ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Analysts and investors can use it to compare businesses in the same sector.<strong> Earnings before interest, taxes, depreciation, and amortization (EBITDA) is the key figure used in determining the enterprise value-to-EBITDA ratio.<\/strong> It is generally accepted that an EV\/EBITDA figure of less than 10 is considered good.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Price_to_Sales_PS_ratio\"><\/span><strong>Price to Sales (P\/S) ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The price-to-sales ratio (P\/S ratio) is commonly used to value equities. <strong>You can figure out a company&#8217;s market capitalization by dividing its annual revenue by the price of a share of stock during its most recent trading period.<\/strong><\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Price_to_Cash_flows_PCF_ratio\"><\/span><strong>Price to Cash flows (P\/CF) ratio<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>The price-to-cash flow (P\/CF) ratio is a multiple used to examine the relationship between the market value of a firm and its operating cash flow. <\/strong>For valuation purposes, large non-cash expenses, such as depreciation, lend themselves well to the P\/CF multiple.<\/p>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"ast-oembed-container \" style=\"height: 100%;\"><iframe loading=\"lazy\" title=\"What is the Discounted Cash Flow model DCF?\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/eTqhnVRrOEc?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Time_Period\"><\/span><strong>Time Period&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The time frame chosen should ensure that the companies being compared have been at roughly the same stage of development.<strong> A common practice in this field is to consider a longer time frame such as a 5-year time frame in which to make comparisons.<\/strong> However, other time periods may be acceptable if adequately explained.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Data_Analysis\"><\/span><strong>Data Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Once our basic requirements for comparison with another company which is a peer business that showcases similar financial performance with a similar stage of business in regards to the time period in business. We now do the data analysis to see exactly how and where the company has the upper hand or otherwise.<\/p>\n\n\n\n<p><strong>Financial Analysis &amp; performance evaluation of the peer companies must be done and the same needs to be compared with the company we wish to invest in.<\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-3 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Intrinsic_valuation\"><\/span><strong>Intrinsic valuation<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Once the comparative relative valuation is completed.<strong> We do the intrinsic valuation to evaluate the actual worth of the company with respect to what it is being quoted in the open market.<\/strong> There are chances when an entire industry is overvalued. This means each and every company in the business will be valued high for some economic or geopolitical reasons.&nbsp;<\/p>\n\n\n\n<p>In the case of relative valuation, we realize this fact in the initial stage itself. And, when intrinsic valuation is done, we will know the actual worth of the company along with its peers and industry average.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Pros_of_Relative_Valuations\"><\/span><strong>Pros of Relative Valuations:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol><li>Relative valuation is comparatively easy and convenient to do by any stock market beginner investors.<\/li><li>A relative valuation can be done in a less time-consuming &amp; simpler manner.<\/li><li>The relative valuation required Financial Data that are easily accessible on Public platforms. Hence, it is doable by every individual.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Cons_of_Relative_Valuations\"><\/span><strong>Cons of Relative Valuations:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol><li>A relative valuation cannot help in every industry. Some businesses are unique in nature hence, just financial comparison doesn&#8217;t show the true price of valuation.<\/li><li>Relative valuation expects for many speculative assumptions to be made. Hence, such decisions may not give the right answer each time.<\/li><li>Relative valuation is backward looking. It\u2019s an analysis of past figures with a future outlook estimation. Although such a method is widely accepted. They may not provide an accurate outcome.<\/li><\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Types_of_Relative_Valuation_Models\"><\/span><strong>Types of Relative Valuation Models:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The two most popular forms of relative valuation models are the examination of comparable companies and the analysis of precedent transactions. For a thorough understanding of each approach, see the descriptions below:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Comparable_Company_Analysis\"><\/span><strong>Comparable Company Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Businesses are sometimes valued using &#8220;Comps,&#8221; an abbreviation for &#8220;comparable company analysis,&#8221; in which they are compared to other publicly traded companies in the same industry. <\/strong>To calculate a company&#8217;s P\/E ratio, an analyst will compare the stock price at the time of calculation to the company&#8217;s earnings or some other relevant statistic. This ratio will be used as a starting point to try to figure out how much a company is worth.<\/p>\n\n\n\n<p>Comps have the advantage of being up-to-date all the time, and financial data for publicly traded companies is often not hard to come by.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Precedent_Transaction_Analysis\"><\/span><strong>Precedent Transaction Analysis<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Companies can be valued using precedent transactions, or &#8220;precedents,&#8221; which involve the purchase and sale of similar businesses in the past (mergers and acquisitions). <\/strong>What an investor was willing to spend for the whole company can be inferred from these deals. Ratios like EV\/EBTIDA are also used in precedents.<\/p>\n\n\n\n<p>While precedents might be helpful when attempting to place a value on an entire organization (such as a takeover premium or control premium), they are sometimes difficult to come by and rapidly become out of date.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Relative_Valuation_Model_vs_Absolute_Valuation_Model\"><\/span><strong>Relative Valuation Model vs. Absolute Valuation Model:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Relative valuation is a method of assigning a dollar amount to a company by comparing it to similar companies or to some sort of benchmark. <\/strong>Finding a median in a specific field might serve as a useful baseline against which individual contributions can be evaluated.<\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-4 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p>Conversely, an absolute measure does not compare itself to any other value. The market capitalization of an organization is the total market value of all of its outstanding shares, and it is expressed as a simple dollar sum that provides no insight into the worth of the business. Naturally, relative valuation can be derived with sufficient absolute valuation measurements across multiple enterprises.<\/p>\n\n\n\n<p>For more information on <strong>&#8220;Absolute Valuation&#8221;<\/strong>, Check this article. <strong><span style=\"text-decoration: underline;\"><a href=\"https:\/\/www.wallstreetoasis.com\/resources\/skills\/valuation\/absolute-valuation\">CLICK HERE!<\/a><\/span><\/strong><\/p>\n\n\n\n<figure class=\"wp-block-embed aligncenter is-type-wp-embed is-provider-rakshith-pai wp-block-embed-rakshith-pai\"><blockquote class=\"wp-embedded-content\" data-secret=\"6sidhjUODD\"><a href=\"https:\/\/rakshithpai.com\/value-investing-the-charm-of-investing\/\">Value Investing &#8211; The charm of investing:<\/a><\/blockquote><iframe class=\"wp-embedded-content\" sandbox=\"allow-scripts\" security=\"restricted\" style=\"position: absolute; clip: rect(1px, 1px, 1px, 1px);\" title=\"&#8220;Value Investing &#8211; The charm of investing:&#8221; &#8212; \" src=\"https:\/\/rakshithpai.com\/value-investing-the-charm-of-investing\/embed\/#?secret=0YC12ywExY#?secret=6sidhjUODD\" data-secret=\"6sidhjUODD\" width=\"200\" height=\"200\" frameborder=\"0\" marginwidth=\"0\" marginheight=\"0\" scrolling=\"no\"><\/iframe><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Relative_Valuation_Model_vs_Intrinsic_Valuation_Model\"><\/span><strong>Relative Valuation Model vs. Intrinsic Valuation Model:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Intrinsic valuation models attempt to evaluate a business without comparing it to others, while relative valuation models use comparisons across businesses as a means of arriving at a value.<\/strong><\/p>\n\n\n\n<p>The Net Present Value (NPV) of an organization&#8217;s projected cash flows into the future is the most frequent form of intrinsic valuation. This is accomplished through a process known as Discounted Cash Flow (DCF) analysis.<\/p>\n\n\n\n<p>A DCF model&#8217;s strengths lie in its comprehensiveness and independence from the performance of competing businesses. There is a need for a large number of assumptions, and the value of the company is highly sensitive to variations in some critical assumptions.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>This article explains the meaning, features, pros, and cons of relative price valuation measurements, which must be kept in mind in comparing a stock ratio to the ratio of other companies in the same industry.<\/strong> The argument is that one may draw erroneous conclusions from a comparison analysis, despite the fact that it is easier to understand. Consequently, we need to exercise caution while employing relative valuation. The best way to evaluate a firm is to master the process of fundamental analysis.<\/p>\n\n\n\n<p><strong>Unanalyzed stock investments can be significantly less accurate than those based on comparable valuation. Therefore, the relative price valuation method is a good place to start for anyone interested in stock analysis.<\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-5 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span><strong>FAQs:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<div class=\"wp-block-uagb-faq uagb-faq__outer-wrap uagb-block-85a6a191 uagb-faq-icon-row uagb-faq-layout-accordion uagb-faq-expand-first-false uagb-faq-inactive-other-true uagb-faq__wrap uagb-buttons-layout-wrap uagb-faq-equal-height\" data-faqtoggle=\"true\" role=\"tablist\">\n<div class=\"wp-block-uagb-faq-child uagb-faq-child__outer-wrap uagb-faq-item uagb-block-cab78824\" role=\"tab\" tabindex=\"0\"><div class=\"uagb-faq-questions-button uagb-faq-questions\"><span class=\"uagb-icon uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M432 256c0 17.69-14.33 32.01-32 32.01H256v144c0 17.69-14.33 31.99-32 31.99s-32-14.3-32-31.99v-144H48c-17.67 0-32-14.32-32-32.01s14.33-31.99 32-31.99H192v-144c0-17.69 14.33-32.01 32-32.01s32 14.32 32 32.01v144h144C417.7 224 432 238.3 432 256z\"><\/path><\/svg><\/span><span class=\"uagb-icon-active uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M400 288h-352c-17.69 0-32-14.32-32-32.01s14.31-31.99 32-31.99h352c17.69 0 32 14.3 32 31.99S417.7 288 400 288z\"><\/path><\/svg><\/span><span class=\"uagb-question\"><strong>What is Relative Valuation?<\/strong><\/span><\/div><p class=\"uagb-faq-content\">A relative valuation methodology looks at how it stacks up against similar businesses. A ratio analysis is done to evaluate a company&#8217;s relative worth.<\/p><\/div>\n\n\n\n<div class=\"wp-block-uagb-faq-child uagb-faq-child__outer-wrap uagb-faq-item uagb-block-8dd3dcee\" role=\"tab\" tabindex=\"0\"><div class=\"uagb-faq-questions-button uagb-faq-questions\"><span class=\"uagb-icon uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M432 256c0 17.69-14.33 32.01-32 32.01H256v144c0 17.69-14.33 31.99-32 31.99s-32-14.3-32-31.99v-144H48c-17.67 0-32-14.32-32-32.01s14.33-31.99 32-31.99H192v-144c0-17.69 14.33-32.01 32-32.01s32 14.32 32 32.01v144h144C417.7 224 432 238.3 432 256z\"><\/path><\/svg><\/span><span class=\"uagb-icon-active uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M400 288h-352c-17.69 0-32-14.32-32-32.01s14.31-31.99 32-31.99h352c17.69 0 32 14.3 32 31.99S417.7 288 400 288z\"><\/path><\/svg><\/span><span class=\"uagb-question\"><strong>Why is Relative valuation important?<\/strong><\/span><\/div><p class=\"uagb-faq-content\">If you&#8217;re an investor looking to screen and shortlist stocks to develop a set of new investments or determine whether or not an existing investment is overvalued relative to its peers and should be sold, relative valuation is a lot faster method that can help.<\/p><\/div>\n<\/div>\n\n\n\n<div class=\"wp-block-uagb-faq uagb-faq__outer-wrap uagb-block-7220ec19 uagb-faq-icon-row uagb-faq-layout-accordion uagb-faq-expand-first-false uagb-faq-inactive-other-true uagb-faq__wrap uagb-buttons-layout-wrap uagb-faq-equal-height\" data-faqtoggle=\"true\" role=\"tablist\">\n<div class=\"wp-block-uagb-faq-child uagb-faq-child__outer-wrap uagb-faq-item uagb-block-41a4efdc\" role=\"tab\" tabindex=\"0\"><div class=\"uagb-faq-questions-button uagb-faq-questions\"><span class=\"uagb-icon uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M432 256c0 17.69-14.33 32.01-32 32.01H256v144c0 17.69-14.33 31.99-32 31.99s-32-14.3-32-31.99v-144H48c-17.67 0-32-14.32-32-32.01s14.33-31.99 32-31.99H192v-144c0-17.69 14.33-32.01 32-32.01s32 14.32 32 32.01v144h144C417.7 224 432 238.3 432 256z\"><\/path><\/svg><\/span><span class=\"uagb-icon-active uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M400 288h-352c-17.69 0-32-14.32-32-32.01s14.31-31.99 32-31.99h352c17.69 0 32 14.3 32 31.99S417.7 288 400 288z\"><\/path><\/svg><\/span><span class=\"uagb-question\"><strong>What are absolute and relative valuations?<\/strong><\/span><\/div><p class=\"uagb-faq-content\">When compared to absolute value, relative value is much lower. But an asset or company&#8217;s relative worth is based on how it compares to others that are similar in nature.<\/p><\/div>\n\n\n\n<div class=\"wp-block-uagb-faq-child uagb-faq-child__outer-wrap uagb-faq-item uagb-block-28bcea1d\" role=\"tab\" tabindex=\"0\"><div class=\"uagb-faq-questions-button uagb-faq-questions\"><span class=\"uagb-icon uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M432 256c0 17.69-14.33 32.01-32 32.01H256v144c0 17.69-14.33 31.99-32 31.99s-32-14.3-32-31.99v-144H48c-17.67 0-32-14.32-32-32.01s14.33-31.99 32-31.99H192v-144c0-17.69 14.33-32.01 32-32.01s32 14.32 32 32.01v144h144C417.7 224 432 238.3 432 256z\"><\/path><\/svg><\/span><span class=\"uagb-icon-active uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M400 288h-352c-17.69 0-32-14.32-32-32.01s14.31-31.99 32-31.99h352c17.69 0 32 14.3 32 31.99S417.7 288 400 288z\"><\/path><\/svg><\/span><span class=\"uagb-question\"><strong>What are the advantages of Relative valuation?<\/strong><\/span><\/div><p class=\"uagb-faq-content\">The main advantage of relative valuation approaches is how simple they are to carry out as a study (i.e., in comparison to intrinsic value methods like the DCF). Comps analyses are typically faster and more accessible than traditional methods, but there are always exceptions.<\/p><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"For_More_Information_Watch_YouTube_Video\"><\/span><strong>For More Information, Watch YouTube Video:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"ast-oembed-container \" style=\"height: 100%;\"><iframe loading=\"lazy\" title=\"How can I start investing in the stock market given that I have no knowledge in this field?\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/Kkc37VhKs5g?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-6 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background\" href=\"https:\/\/zerodha.com\/open-account?c=PR4768\" style=\"border-radius:50px;background-color:#e4fa00;color:#0f0027\" rel=\"nofollow\"><strong>Open Zerodha Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p><strong><strong>Disclaimer: <\/strong><\/strong>All the information on this website is published in good faith and for general information purposes only.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"also-read\"><span class=\"ez-toc-section\" id=\"Also_read\"><\/span><strong>Also read:<\/strong> <span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><a href=\"https:\/\/rakshithpai.com\/equity-fund-vs-debt-fund\/\" target=\"_blank\" rel=\"noreferrer noopener\">Equity Fund or Debt Mutual Fund &#8211; Which one&#8217;s better?<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/common-stock-market-scams\/\" target=\"_blank\" rel=\"noreferrer noopener\">Five (5) Most Common Scams in Stock Market:<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/debt-financing-importance\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is Debt Financing? Features, Advantages &amp; Disadvantages:<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/shortlist-quality-companies\/\" target=\"_blank\" rel=\"noreferrer noopener\">How to Short-list Companies Worth Investing?<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/tv18-stock-analysis\/\" target=\"_blank\" rel=\"noreferrer noopener\">TV 18 Broadcast Ltd. Is it Worth Investing?<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>What Is a Relative Valuation Model? A company&#8217;s worth can be estimated using a relative valuation model by comparing it to the worth of other companies in the same industry. Absolute value models try to calculate a company&#8217;s value by discounting its expected future free cash flows to the present, with no consideration of how [&hellip;]<\/p>\n<div class='heateor_sss_sharing_container heateor_sss_vertical_sharing heateor_sss_bottom_sharing' style='width:44px;right: -10px;top: 100px;background-color: Dark Blue' data-heateor-sss-href='https:\/\/rakshithpai.com\/wp-json\/wp\/v2\/posts\/4780'><div class=\"heateor_sss_sharing_ul\"><a aria-label=\"Facebook\" class=\"heateor_sss_facebook\" href=\"https:\/\/www.facebook.com\/sharer\/sharer.php?u=https%3A%2F%2Frakshithpai.com%2Fwp-json%2Fwp%2Fv2%2Fposts%2F4780\" title=\"Facebook\" rel=\"nofollow noopener\" target=\"_blank\" style=\"font-size:32px!important;box-shadow:none;display:inline-block;vertical-align:middle\"><span class=\"heateor_sss_svg\" 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