Relative Valuation Models

Relative valuation models specify an asset’s value relative to the value of another asset. As applied to equity valuation, relative valuation is known as the method of comparables.

In applying the method of comparables, analysts compare a stock’s price multiple to the price multiple of a similar stock or the average or median price multiple of some group of stocks.

Relative equity valuation models do not address intrinsic value without the further assumption that the price of the comparison value accurately reflects its intrinsic value.