- Relative valuation: This is by far the most common type of valuation method in the market, for reasons I’ll discuss in a moment. With relative valuation methods, you’re comparing one company’s metrics (price-to-earnings, price-to-book, etc.) versus another company or the industry at large. For example, if there are two equally good companies, but one trades for ten-times earnings and the other for fifteen-times earnings, you would conclude that the company that trades for ten-times earnings is relatively undervalued.
- Absolute valuation: The point of absolute valuation methods like the dividend discount (DDM) and discounted cash flow (DCF) models is to determine the “intrinsic” or fair value of a company, regardless of how its metrics stack up against competitors at a given time.
Almost 85% of equity research reports are based on valuation multiples and comparables.
More than 50% of all acquisition valuations are based on multiples.
|Rules of thumb based on multiples are not only common but are also often the basis for final valuation judgments.|
That the market can be irrational in the short term.
That we have something the market doesn’t have.
That the market will eventually correct itself.