Relative Valuation: How Investors Use Multiples (P/E, EV/EBITDA)
Relative valuation explained: how investors value stocks using multiples like P/E and EV/EBITDA, how to compare peers, and common pitfalls.
What is relative valuation?
Relative valuation estimates fair value by comparing a company's multiples (like P/E or EV/EBITDA) to peers, industry averages, or historical norms.
Common multiples
- P/E: price vs earnings (equity-based)
- EV/EBITDA: enterprise value vs operating earnings (capital-structure neutral)
- P/S: price vs revenue (useful when earnings are noisy)
A low multiple can mean undervaluation, or it can mean low growth / high risk. Use fundamentals and intrinsic value as a cross-check.
Compare valuation across stocks
Use tools to compare multiples and fundamentals, then validate with intrinsic value and margin of safety.
FAQs
Is relative valuation better than DCF?▼
They answer different questions. Relative valuation is fast and market-aware; DCF is more fundamental but more assumption-driven. Many investors use both.
What is the biggest pitfall with multiples?▼
Comparing companies with different growth, risk, or accounting profiles as if they were identical peers.
Related
Intrinsic Investor is for education and research only. Not financial advice.