Relative Valuation Models

Relative valuation assumes that the market is correct on average and values a firm by comparing its financial multiples to those of its peers.

Comparable Company Analysis (CCA)

Comparable Company Analysis (CCA) evaluates a target firm by benchmarking its valuation multiples against a peer group of publicly traded companies with similar size, growth profiles, and capital structures:

• Price-to-Earnings (P/E): Most common, but susceptible to accounting manipulation and capital structure distortion.
• EV-to-EBITDA (Enterprise Value / EBITDA): Capital-structure neutral and highly superior for capital-intensive industries. EV represents the total cost to acquire the entire firm ($\text{Market Cap}+\text{Total Debt}-\text{Cash}$).
• Price-to-Sales (P/S): Crucial for early-stage growth companies that have not yet reached positive net profitability.
• Price-to-Book (P/B): Standard metric for evaluating banks, real estate firms, and asset-heavy industrial companies.

In practice, rely on a combination of these models (intrinsic and relative) to establish a valuation range. For deeper exploration of valuation mechanics, refer to Aswath Damodaran’s Investment Valuation or Benjamin Graham’s classic Security Analysis.