Relative valuation
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
Valuing an asset using multiples from comparable assets.
Relative valuation in plain English
Relative valuation figures out what something is worth by comparing it to similar things that already have known prices, rather than calculating its value from scratch. The trick is to use a 'multiple' — a ratio like price divided by earnings — so you can compare a big company to a small one fairly. It's exactly how you'd price a used car: instead of rebuilding its value part by part, you check what nearly identical cars are selling for and reason 'mine should go for about the same.' The catch is that your answer is only as good as your comparisons — if the whole group is overpriced, your estimate inherits that error.
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Practice Relative valuation
Which of the following describes the 'Law of One Price' as it applies to relative valuation?
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