Aswath Damodaran 536
Relative Valuation
! In relative valuation, the value of an asset is derived from the pricing of
'comparable' assets, standardized using a common variable such as earnings,
cashflows, book value or revenues. Examples include - -
- Price/Earnings (P/E) ratios
- and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples)
- Price/Book (P/BV) ratios
- Price/Sales ratios
This is the preferred mode of valuation on Wall Street. Philosophically, it is a
different way of thinking about valuation.
In relative valuation, we assume that markets make mistakes on individual
investments, but that they are right, on average, in how they price a sector or the
market. (In discounted cash flow valuation, we assume that markets make
mistakes over time.)