Libguides: Relative Valuation in the Bloomberg Terminal: Relative Valuation

A valuation is a process that helps determine a company price. There are two ways how can we determine the value of company: a) absolute valuation or b) relative valuation.

In reality it is hard to set correct price for a company as its cost is influenced by many factors.

Every valuation is subjective as it depends on projected future growth which is hard to determine
While absolute valuation focuses on finding out the price of any company with the use of formulas, relative valuation compares one company to another within the same industry.
The objective of relative valuation is to find out if one company is under or over-valued relative to its peers.
In the end, relative valuation relies both on intrinsic value and actual company prospects.

Common metrics we can use in relative valuation are:

price to earnings ratio
return on equity
operating margin
enterprise value
price to free cash flow

Chart comparison

This chart provides you with a comparison between absolute and relative valuation.

Chart explanation

The main advantage for absolute valuation is that the final result is more precise as it is based on actual numbers of the given company rather than feelings. On the other hand relative valuation is far more simple, key features are price to earnings or dividend payout comparison of one company to the another. Yet absolute valuation has drawbacks in its complexity and it can also be easily misinterpreted with the work of skilled accountant that can mislead company free cash flow. Relative valuation has negative sides in the fact that it can be hard to find two firms to compare as no company is same. Furthermore, when you are comparing one company to another, you are assuming that the comparative company is fairly valued, but that may be false.