Relative valuation relies on the theory that, in general, similar companies will produce similar results. This may be a bit simplistic, but in a discipline that involves a lot of assumptions and estimates, relative valuation is popular among analysts as it provides a way to arrive at the value of a business that is plausible, quick, and simple. The actual calculations are simple and straightforward; the difficulty is in identifying comparable companies.
The main criteria to consider are as follows:
- Industry
- Size
- Capital structure
- Geographical location
- Growth rate
Industry: With reference to your major source of income, identify the appropriate industry to which the company belongs and look for examples within that industry class.
Size: The relationship between size and profits is not exactly linear. A company with twice...