14.5 Relative value measures

Question 1

What is “relative value” a measure of?

Answer 1

A measure of an asset’s value, taking into account the value of similar assets in competing companies i.e. the value is relative!

Question 2

What are the steps in relative value analysis?

Answer 2

1 Identify comparable companies (e.g. using revenue)
2 Calculate P/E ratio, price to sales ratio, etc.
3 Compare ratios with peers and industry average