Relative Valuation Model

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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.

BREAKING DOWN '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.

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