Relative Valuation Methods

If Intrinsic Valuation (like DCF) is about what a company is worth in a vacuum, Relative Valuation is about what the market is actually willing to pay for similar companies right now. It is the "real estate" approach to stocks: you value a house by looking at the "comps" (comparable sales) in the same neighborhood.

In the 2026 market, where high-frequency trading and sector rotations move quickly, relative valuation is the fastest way to spot a "bargain" within a hot industry.

1. The Two Pillars of Relative Valuation

Relative valuation is split into two main techniques:

• Comparable Company Analysis ("Trading Comps"): You compare your target company to other publicly traded companies in the same sector. This reflects current market sentiment-how the "crowd" is pricing stocks today.
• Precedent Transactions ("Transaction Comps"): You look at what private buyers (like other companies or private equity firms) paid to acquire similar companies in the past. These usually include a "control premium"-a higher price paid to own the whole business.

2. Common Multiples: Your Valuation Toolkit

A "multiple" is just a way to standardize a company’s price so you can compare it to others.

A. Price-to-Earnings (P/E) Ratio

P/E Ratio = Share Price \ Earnings Per Share (EPS)

The most popular multiple. It tells you how much investors pay for every ₹1 of profit.

• Best For: Companies with stable, positive earnings (e.g., Consumer Goods, established Tech).
• 2026 Insight: Use the Forward P/E (based on next year's estimated earnings) to account for the rapid growth expected in AI-integrated sectors.

B. EV/EBITDA Ratio

EV/EBITDA =

This is often called the "Acquirer's Multiple." It looks at the whole company (including debt) relative to its cash-generating power.

• Best For: Capital-intensive industries (e.g., Telecom, Manufacturing, Energy) where high depreciation can "hide" profits on the income statement.

C. Price-to-Book (P/B) Ratio

P/B Ratio =

• Best For: Financial institutions (Banks, Insurance) and asset-heavy businesses.

D. Price-to-Sales (P/S) Ratio

• Best For: High-growth startups or "turnaround" companies that aren't profitable yet but have massive revenue growth.

3. Step-by-Step: How to do a Relative Valuation

1. Identify the Peer Group: Find 5–10 companies in the same industry, of similar size, and with similar growth rates.
2. Gather the Multiples: Collect the P/E or EV/EBITDA for each peer.
3. Calculate the Average: Find the mean or median multiple for the group (e.g., the "Industry Average P/E" is 20x).
4. Apply to Your Target: Multiply your company's earnings by that industry average.

Example: If the industry average P/E is 15x and your target company earns ₹2.00 per share, its "relative fair value" is ₹30.00.

4. Pros and Cons of Relative Valuation