What is relative valuation?
This is a way of valuing an asset which involves comparing it with other assets. It’s sometimes known as comparable valuation.
Where have you heard of relative valuation?
It’s widely used in the real estate market, so you might have heard of it if you’ve ever bought or sold a house. When a property is bought or sold, the value of that property always complements the value of other properties nearby that have been sold recently.
What you need to know about relative valuation.
It’s a useful alternative to absolute value, which uses discounted cash flow to determine financial worth. Relative valuation can be used in the same way by investors, to help them work out whether it’s a good idea to buy a company’s stock. One popular way of working out relative valuation is the price-to-earnings ratio. This can be calculated using stock prices and earnings per share. If a company has a high price-to-earnings ratio, it is considered overvalued because it’s trading at a higher price per pound than its peers.