Relative valuation
Also written Selling price-based approach · Comparables valuation
Valuing an asset from the prices of comparable assets rather than from its own cash flows — quick, intuitive, and dependent on whoever set those comparable prices being right.
In plain language
The workbook makes the point with an apartment. Before you negotiate, you find what similar flats in the same locality sold for. You are not computing the present value of the rent the flat will earn for thirty years; you are asking what the market pays for a flat like this one.
Relative valuation does the same for a business. Price it against what the market pays for comparable companies, using multiples such as P/E, P/B and EV/EBITDA. It will not tell you what a company is worth. It will tell you whether it is cheap or expensive relative to its peers, which is a different and more modest claim.
How it works
The workbook separates the two sources of comparables.
Trading multiples come from the stock market — what comparable listed companies trade at today.
Transaction multiples come from deals that have actually completed. The workbook rates these more authentic, because they represent the willingness of a real buyer to pay that value for the whole asset, rather than the price of a marginal share.
The method is fast and needs few assumptions, but it carries the market's mood — optimistic or pessimistic — straight into the answer. The workbook's discipline is to look at the maximum, minimum and average rather than one number, and to compare against the industry rather than a single peer. It warns specifically about averages: in a fragmented industry a few outliers pull the mean well above where most firms sit, so check the median as well as the mean before taking a call.
And it insists on companion variables: a low multiple may be a fundamental weakness rather than a bargain. P/E belongs with growth and ROE; EV/EBITDA belongs with return on investment.
A worked example
A speciality chemicals company: FY26 estimated EBITDA Rs 420 crore, net debt Rs 560 crore, 9 crore shares.
Five listed peers trade at EV/EBITDA of 11.2×, 9.8×, 14.6×, 10.1× and 9.5×.
Mean = 55.2 ÷ 5 = 11.04× Median = 10.1×
At the mean:
EV = 420 × 11.04 = Rs 4,636.8 crore
Equity = 4,636.8 − 560 = Rs 4,076.8 crore
Per share = 4,076.8 ÷ 9 = Rs 453
At the median:
EV = 420 × 10.1 = Rs 4,242 crore
Equity = 4,242 − 560 = Rs 3,682 crore
Per share = 3,682 ÷ 9 = Rs 409
The single 14.6× outlier is worth Rs 44 a share, nearly 10% of the valuation. That is the workbook's caution about fragmented industries and outlier players, in rupees.
Now suppose a competitor was acquired last quarter at 13× EBITDA. That transaction multiple values the company at Rs 5,460 crore of EV and Rs 544 a share — a third answer, and on the workbook's reading the most authentic of the three, because someone actually paid it.
Why NISM asks about it
Chapter 10 introduces relative valuation as the third approach in section 10.4, develops it in 10.6, and splits trading from transaction multiples in 10.9. Expect a question on which of the three approaches — cost based, cash flow based, selling price based — a given description belongs to, and on why transaction multiples are considered more authentic than trading multiples.
Common exam traps
- It is a relative answer, not an absolute one. If the entire sector is overpriced, every member of it looks fairly valued.
- Match the numerator to the denominator. P/E and PEG are equity multiples; EV/EBITDA, EV/EBIT and EV/Sales are whole-firm multiples. Pairing market capitalisation with EBITDA is the classic mismatch.
- Check the median, not just the mean. The workbook warns that outliers in a fragmented industry pull the average up while most firms sit near the median.
- A low multiple is not automatically cheap. Use the companion variables — P/E against growth and ROE, EV/EBITDA against ROI — to see whether the discount reflects a real weakness.
- Transaction multiples usually include a control premium that a minority shareholder in the listed market will never be paid.
- Cost based valuation is a third approach, not part of this one. It values an asset at what it would cost to create, and the workbook says it is generally unsuitable for financial investors.
Where this is taught
- Series XV · Chapter 10: Valuation Principlesintroduced here
- Series XIX-C · Chapter 14: Valuationintroduced here
- Series XIX-A · Chapter 11: Valuationintroduced here
Related terms
- Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.
- Earnings yieldEarnings per share divided by the current market price — the reciprocal of the P/E ratio, expressed as a percentage so that equity can be set directly against a bond yield.
- Enterprise ValueWhat it would cost to buy the whole business — market capitalisation plus debt, less cash — as opposed to market capitalisation, which buys only the equity.
- Intrinsic valueWhat an asset is actually worth — the present value of the cash it will generate over its remaining life, as against whatever price the market is quoting today.
- PEG ratioThe price to earnings ratio divided by the expected earnings growth rate — Peter Lynch's way of asking whether a high P/E is justified by the growth behind it.
- Price to Book ValueShare price divided by book value per share — how many times the accounting net worth of a company the market is willing to pay.
- Sum-of-the-partsValuing a conglomerate by valuing each business separately on its own appropriate multiple and adding the results, instead of applying one blended multiple to the group.
- Market approachValuing a business from what the market pays for comparable businesses, using earnings and market multiples rather than the company's own projected cash flows.