DEFINITION of 'Rich Valuation'

An asset that is being valued by investors at a very substantial premium, either in terms of its earnings or cash flow, or in relation to its peers. A rich valuation on an asset may also be considered if it is trading at levels that are much higher than historical norms. The term is applicable to the valuation of any asset, but it is most commonly used with reference to stock valuations. An asset that is trading at a rich valuation may have a risk/reward payoff that is not particularly attractive to value investors.

BREAKING DOWN 'Rich Valuation'

Stocks that are trading at very high multiples in relation to their earnings or book value (price/earnings or price/book ratios), compared to their peers, are considered to be trading at rich valuations. Similarly, a real estate investment trust would be considered to be richly valued if it is trading at a high multiple of its funds from operations (price/FFO).

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