Relative Valuation

Relative valuation is a method of valuing an asset by comparing it to the valuation of similar assets. This approach often involves using financial metrics such as price-to-earnings (P/E), price-to-sales (P/S), or price-to-book (P/B) ratios to determine whether an asset is overvalued or undervalued compared to its peers. Investors widely use relative valuation to assess the attractiveness of a stock or company in relation to its competitors or industry standards.

Example

An investor compares the P/E ratio of a tech company to its industry average to determine whether the stock is fairly valued or if it represents a potential investment opportunity.