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Lesson 2 of 9 · 12 min
The relative valuation process
Relative valuation is a disciplined five-step process: pick comparable companies, pick a multiple whose numerator and denominator belong to the same claimants, compute it consistently, read where the company sits in the peer distribution, and then apply the multiple to estimate value.
In short
- Five steps: choose a peer group, select a multiple, calculate and compare, judge relative value, apply the multiple (directly, or inside a DCF).
- Match claimants: a price or market cap numerator goes with equity measures (net income, dividends, FCFE, book equity); enterprise value goes with measures available to all capital providers (revenue, EBIT, EBITDA, FCFF).
- Define and compute the multiple consistently for every company: same accounting basis, same price date, no one-off items.
- The peer mean or median is taken as the 'fair' multiple; with positive skew the mean sits above the median, so the median is usually the better benchmark.
- Negative-earnings peers give a not meaningful P/E; set a consistent rule for outliers. A gap to peers may be mispricing or a real difference in risk, growth or business mix.
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