A Guide to Relative Valuation

Posted by Adam Giddens

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What is ‘relative valuation’?

Relative valuation is the notion of comparing the price of a company to the market value of similar companies.

To do this we need to use relevant multiples (P/E, EV/SALES, EV/EBITDA, etc.).

The multiples used in a relative valuation model must be a relevant proxy for a company’s value. For example, we cannot compare the average age of employees of different companies to determine their value, that would make no sense. We need to use metrics that are directly associated with a company’s intrinsic value, such as: sales, market cap, net income, and many others. Also, the companies we are comparing MUST BE RELATED in terms of industry and business operations.

For example, you cannot compare CloudMD or WELL Health Technologies to a cannabis company or a gold mining company. That is the same as comparing apples to oranges and your analysis would be useless…CLICK for complete article