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

The Ubiquity of Relative Valuation

Notwithstanding the focus on discounted cash flow valuation in classrooms and in theory, evidence exists that most assets are valued on a relative basis. In fact, consider the following:

• Most equity research reports are based on multiples. Price/earnings (PE) ratios, enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA), price, and price-to-sales ratios are but a few examples. In a study of 550 equity research reports in early 2001, relative valuations outnumbered discounted valuations almost ten to one.^[1] While many equity research reports included the obligatory cash flow tables, values were estimated and recommendations were made by looking at comparable firms and ...