What Is Relative Value?

Relative value is a valuation approach that assesses an asset’s worth by comparing it to similar assets. Instead of estimating intrinsic worth from first principles, relative valuation uses market multiples and peer comparisons to determine whether an asset appears cheap, fair, or expensive relative to its competitors.

Common Multiples and Metrics

Price-to-earnings (P/E) ratio — price per share divided by earnings per share.
Price-to-sales (P/S) ratio — market capitalization divided by revenue.
Enterprise value-to-EBITDA (EV/EBITDA) — useful for comparing firms with different capital structures.
Price-to-book (P/B) ratio — market price relative to book value.
Other sector-specific ratios (e.g., subscribers, assets under management).

How to Perform a Relative Valuation

Select appropriate comparables: choose companies or assets with similar business models, size, growth prospects, and risk profiles.
Gather financials: collect market caps, revenues, earnings, EBITDA, book value, and other relevant figures.
Calculate multiples: compute P/E, P/S, EV/EBITDA, P/B, etc., for each comparable.
Compare and interpret: see where the target sits versus peers. A lower multiple may indicate relative undervaluation, a higher multiple relative overvaluation.
Adjust for differences: account for growth differentials, margin profiles, capital structure, and one-off items before drawing conclusions.

Illustrative Example

If Company A has a P/E of 18, peers average 14, and a direct competitor has a P/E of 12, Company A appears expensive relative to that competitor but may be fairly valued or cheap compared with higher-multiple peers. Relative valuation gives context: you might conclude Company A is overvalued versus some rivals and undervalued versus others depending on which comparables you emphasize and how you adjust for differences.

Benefits of Relative Valuation

Practical and market-oriented — reflects how investors price similar opportunities today.
Facilitates apples‑to‑apples comparisons across potential investments.
Quick to apply and widely used across equity, fixed‑income, and alternative markets.
Helpful for choosing among available options (e.g., comparing stock market capitalization relative to GDP across countries).

Limitations and Criticisms

Anchored to prevailing market prices — can favor the best option in a generally overvalued or undervalued market.
Sensitive to choice of comparables — poor peer selection yields misleading conclusions.
May mask fundamental differences (growth, quality of earnings, capital structure) if not adjusted properly.
Doesn’t produce an absolute fair value — it only ranks or contextualizes assets.

Relative Valuation vs. Intrinsic Valuation

Relative valuation compares market multiples; intrinsic valuation estimates a company’s fundamental worth (e.g., discounted cash flow, DCF).
DCF uses projected free cash flows discounted at a required rate to derive a present value independent of current market multiples.
Both methods are complementary: relative valuation shows market context, while intrinsic valuation tests whether market prices deviate from fundamental expectations.

Key Takeaways

Relative value compares similar assets using multiples to determine relative cheapness or expensiveness.
Accuracy depends on careful selection of comparables and adjustments for differences.
Use relative valuation alongside intrinsic methods (like DCF) to form a more complete investment view.