Relative Valuation

What is Relative Valuation?

Mr. Chander Sawhney
Vice President
Relative valuation uses the valuation ratios of comparable publicly traded companies and applies that ratio to the company being valued subject to necessary adjustments. The valuation ratio typically expresses the valuation as a function of a measure of financial performance or Book Value Multiples (e. g. Revenue, EBITDA, EBIT, EPS or Book Value).

Relative Valuation technique hinges upon the efficient market theory which indicates that the price of exchanged securities in the market reflects all readily available information, as well as the supply and demand effects of educated and rational buyers and sellers. In other words, the market is continuously evaluating each company and expressing that valuation in bids and offers for its stock.

Please read the whole article on Slideshare...

A key benefit of Relative valuation analysis is that the methodology is based on the current market stock price. The current market stock price is generally viewed as one of the best valuation metrics because markets are considered somewhat efficient. But applying multiples is not a straight forward technique and many considerations have to be kept in mind when valuing a company. Sanity check is advised by using other valuation methods as well.

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