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Discover relative valuation to learn how companies are priced by comparing them with peers or market benchmarks.
Relative valuation is one of the most widely used techniques in finance for determining the fair value of a company by comparing it with similar businesses. Unlike intrinsic valuation—where analysts estimate value based on discounted cash flows—relative valuation looks outward, using market-driven metrics to understand whether a stock is undervalued or overvalued relative to peers. Because markets often price companies based on industry norms and expectations, relative valuation provides a pragmatic, real-world benchmark of worth.
Relative valuation is a method of valuing a company by comparing financial multiples with those of similar companies or industry averages. It is based on the premise that similar firms should trade at similar valuation levels. If a company’s multiples deviate significantly from its peers, analysts investigate whether the difference is justified.
This technique contrasts with intrinsic valuation, which relies on estimating future cash flows and discounting them to present value. While intrinsic valuation focuses on the company’s fundamentals and internal performance, relative valuation incorporates market sentiment, industry pricing, and competitive positioning. As a result, it is quicker and often more aligned with how markets make decisions.
Relative valuation is popular among analysts, investors and corporate finance professionals because it is:
Simple to apply – Uses readily available financial statement data and market prices.
Fast and efficient – Suitable for quick screening and comparative analysis.
Market-reflective – Captures how investors are currently pricing similar companies.
Flexible – Works across various industries, sizes, and business models.
Widely accepted – Used in equity research, investment banking, private equity and M&A.
It provides a practical sanity check even when intrinsic models are used.
Below are the most commonly used multiples in relative valuation:
| Multiple | Formula | Used For |
|---|---|---|
P/E Ratio |
Price ÷ Earnings per Share |
Profitability comparison |
EV/EBITDA |
Enterprise Value ÷ EBITDA |
Capital-structure-neutral comparison |
Price ÷ Book Value |
Asset-heavy or financial companies |
|
P/S Ratio |
Price ÷ Revenue per Share |
Low-profit or early-stage firms |
PEG Ratio |
P/E ÷ Growth Rate |
Growth-adjusted valuation |
Each multiple highlights different aspects of business performance—profitability, assets, growth, or operational efficiency. Analysts often use a combination of multiples for a well-rounded view.
A relative valuation model uses one or more of these multiples to estimate a company’s fair value. The process typically involves:
Selecting comparable companies (same industry, similar size, similar growth).
Computing relevant valuation multiples for each comparable.
Deriving industry median, average or quartile values.
Applying the selected multiple(s) to the target company’s metrics (earnings, revenue, book value etc.).
The outcome is an estimated fair value range based on how similar firms are priced by the market.
A robust relative valuation must incorporate adjustments so comparisons are fair:
Growth Adjustments – Fast-growing companies may justify higher multiples.
Leverage Adjustments – Capital structure differences require shifts to EV-based metrics.
Accounting Differences – Standardising depreciation, inventory methods or revenue recognition.
One-off Items – Removing extraordinary gains/losses to reflect true operating performance.
Normalisation ensures that valuation multiples reflect economic performance, not accounting noise.
Here’s a quick look at how this approach performs in practice:
Quick and easy to apply.
Based on actual market pricing.
Useful for valuing companies with stable earnings.
Effective for benchmarking competitors and screening investments.
Heavily dependent on the quality of comparable companies.
Market sentiment may create distortions (overvaluation/undervaluation).
Multiples may hide structural weaknesses or risks.
Less suitable for unique or rapidly changing businesses.
Relative valuation must be used alongside qualitative judgement and, where possible, intrinsic valuation.
Relative valuation is used across various fields in finance:
Equity Research: Analyst reports rely on multiples to rate stocks as overvalued/undervalued.
Investment Banking: Used for IPO pricing, fairness opinions and deal negotiations.
Private Equity: Helps evaluate acquisition targets and compare exit multiples.
M&A: Buyers and sellers benchmark companies using sector-specific multiples.
Sector Analysis: Compares companies’ valuation placements within an industry.
Industries such as technology, retail, banking and manufacturing each rely on unique combinations of multiples.
Assume a tech company, AlphaTech, reports:
Earnings per Share (EPS): ₹12
EBITDA: ₹100 crore
Book Value per Share: ₹50
Comparable companies trade at:
Average P/E: 18
Average EV/EBITDA: 12
Fair Price = 18 × ₹12 = ₹216 per share
Fair Enterprise Value = 12 × ₹100 crore = ₹1,200 crore
If AlphaTech’s current market price is ₹160 per share, the stock may be undervalued. Analysts would dig deeper to validate the difference.
Relative valuation remains a practical and widely used approach for assessing company value. It offers speed, simplicity and strong market relevance, making it effective for peer comparisons and early-stage evaluations. However, its reliability depends on choosing suitable comparables, adjusting for differences and interpreting multiples correctly. When combined with intrinsic valuation methods, it becomes an important framework for understanding how the market prices a business.
Key Points to Note:
Provides efficient and widely applied valuation insights
Useful for peer comparisons and initial assessments
Depends heavily on selecting accurate comparables
Requires proper adjustments for differences in size, growth and risk
Is most effective when used with intrinsic valuation methods
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Relative valuation is a method that estimates a company’s value by comparing its financial multiples with those of peer firms operating in similar industries or market conditions.
Relative valuation benchmarks a company against others using market multiples, whereas intrinsic valuation derives value from the present value of expected future cash flows.
Commonly used multiples include P/E, EV/EBITDA, P/B, P/S, and PEG, each highlighting a different aspect of valuation such as profitability, asset base, or growth.
A relative valuation model applies appropriate peer multiples to a target company’s financial metrics to estimate a fair market value range.
Comparable companies are selected based on similarity in industry, size, growth prospects, business model, and risk profile to ensure a meaningful comparison.
Adjustments in relative valuation may include normalising financial statements, adjusting for leverage differences, removing one-off items, and considering growth variations across firms.
Limitations of relative valuation include reliance on market sentiment, difficulty in finding suitable comparables, and limited insight into long-term fundamentals or cash flow sustainability.
Yes, relative valuation is widely used in mergers and acquisitions for initial pricing, negotiation, and benchmarking transaction multiples.
Analysts often prefer intrinsic valuation when assessing early-stage companies, businesses with volatile earnings, or firms lacking a reliable peer group.
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