The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

4. Relative Valuation

In discounted cash flow valuation, the objective is to find the value of an asset given its cash flow, growth, and risk characteristics. In relative valuation, the objective is to value an asset based on how similar assets are currently priced by the market. Consequently, relative valuation has two components. The first is that to value assets on a relative basis, prices have to be standardized, usually by converting prices into multiples of some common variable. While this common variable varies across assets, it usually takes the form of earnings, book value, or revenues for publicly traded stocks. The second component is to find similar assets. This is difficult to do, because no two assets are identical. With real assets, ...