Whyistheuseofrelativevaluationsowidespread?Whydo
managersandanalystsrelatesomuchbettertoavaluebased
onamultipleandcomparablesthantodiscountedcashflow
valuation?Inthissection,weconsidersomeofthereasonsfor
the popularity of multiples.
- Useof multiplesandcomparables islesstime and
resource intensive than discounted cash flow
valuation. Discounted cash flow valuations require
substantially more information than relative
valuation. For analysts who are faced with time
constraintsandlimitedaccesstoinformation,relative
valuation offers a less time-intensive alternative. - It is easier to sell. In many cases, analysts in
particular and salespeople use valuations to sell
stockstoinvestors andportfoliomanagers.Itisfar
easierto sellarelativevaluationthana discounted
cashflowvaluation.Afterall,discountedcashflow
valuations can be difficult to explain to clients,
especially when working under a time
constraint—many sales pitches are made over the
phonetoinvestorswhohaveonlyafewminutesto
spareforthepitch.Relativevaluations,incontrast,fit
neatly into short sales pitches. Using political
terminology, it is far easier to spin a relative
valuationthanit isto spina discounted cash flow
valuation. - Itiseasiertodefend.Analystsareoftencalledupon
to defend their valuation assumptions in front of
superiors, colleagues, and clients. Discounted cash
flow valuations, with their long lists of explicit
assumptions,aremuchmoredifficulttodefendthan
relative valuations, where the value used for a