Lesson 7 of 7 · All lessons in this module
- Intrinsic value, mispricing and the three model familiesVideo lesson
- Perceived value, investor and issuer actions, and value ranges
- Book value, market value, ROE and the cost of equityVideo lesson
- Book value of equity: what it measures and how it misleads
- Market capitalisation, price-to-book and enterprise value
- Absolute valuation: present value and asset-based models
- Relative valuation and reconciling several models
This lesson is part of the 2027 curriculum. You are following the 2026 curriculum, where it is not taught in this form. Switch if you are sitting the exam under the 2027 curriculum.
Lesson 7 of 7 · 13 min
Relative valuation and reconciling several models
Relative valuation compares price or EV multiples with comparable companies, simply but at the mercy of the peer group; analysts then combine several models' value ranges, weighting them by confidence and digging deeper when they disagree.
In short
- Comparables models divide price or EV by revenue, earnings, cash flow or book value to price companies per unit of a fundamental.
- P/E needs a positive, meaningful denominator, consistent trailing or forward EPS, and earnings cleaned of non-recurring items.
- EV/EBITDA above the composite suggests overvaluation, below it undervaluation; EBITDA is rarely negative, so more peers qualify than for P/E.
- Relative models are simple and easy to compare, and can use forecasts; their main limit is choosing comparables, and they may miss company-specific factors.
- Analysts compare several models' ranges with the trading range in a football field chart, weight them by confidence, and investigate high dispersion.
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