PART TWO
Relative Valuation
Inrelativevaluation,wevalueassetsbased onhowsimilar
assets arepriced. Webegin this section, in Chapter 7, by
notingthatmostvaluationsinpracticearerelativevaluations
andpresentreasonsfortheallureofthisapproach.Sinceitis
pointless to argue against relative valuation, we present a
four-step process to use multiples correctly and to detect
when they are being misused.
In Chapter 8, we look at equity multiples, starting with
price-earnings (P/E) ratios. After presenting the many
versionsofP/Eratiothatweseeinpractice,weexaminetheir
statistical properties and the determinants. We then apply
them to value individual firms in sectors and broaden the
applicationtolookattheentiremarket.Wedothesamewith
price-earnings/growth(PEG)ratios,price-to-bookratios,and
price-to-sales ratios.
In Chapter 9, we look at firm value and enterprise value
multiplesandapplythesametechniques weusedwithP/E
ratios.Aftersiftingthroughdifferentdefinitionsofcommonly
used multiples (like EV/EBITDA), we consider their
determinants and the key questions we needto be asking
aboutfirms thatarevalued usingthesemultiples.Wealso
look atwaysinwhich wecanextend relativevaluationto
value young or distressed money-losing companies.