Relative Valuation Model

AAA

DEFINITION of 'Relative Valuation Model'

A business valuation method that compares a firm's value to that of its competitors to determine the firm's financial worth. Relative valuation models are an alternative to absolute value models, which try to determine a company's intrinsic worth based on its estimated future free cash flows discounted to their present value. Like absolute value models, investors may use relative valuation models when determining whether a company's stock is a good buy.

INVESTOPEDIA EXPLAINS 'Relative Valuation Model'

Relative valuation is not as straightforward as it might appear on the surface. Which companies are chosen as comparable companies and which multiples are used to determine value will have a significant outcome on a company's relative valuation. When performing a relative valuation, a company's sector should be used to determine the most logical multiple to use. For example, price to cash flow for real estate and price to sales for retail.

RELATED TERMS
  1. Asset-Based Approach

    A type of business valuation that focuses on a company's net ...
  2. Absolute Value

    A business valuation method that uses discounted cash flow analysis ...
  3. Perceived Value

    The worth that a product or service has in the mind of the consumer. ...
  4. Discounted After-Tax Cash Flow

    An approach to valuing an investment that looks at the amount ...
  5. Extrinsic Value

    The difference between an option's market price and its intrinsic ...
  6. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
Related Articles
  1. Investment Valuation Ratios
    Markets

    Investment Valuation Ratios

  2. The Big Credit Card Companies Have Room ...
    Stock Analysis

    The Big Credit Card Companies Have Room ...

  3. Wall Street's Enduring Impact On The ...
    Investing Basics

    Wall Street's Enduring Impact On The ...

  4. Playing Penny Stock-Like ETFs
    Stock Analysis

    Playing Penny Stock-Like ETFs

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center