When conducting Relative Valuation, remember the key attributes of each step.
Remember that only a combination of different metrics and companies will give you an accurate picture of the company's performance.
The problem is that the P/E, ROE, or operating margin can remain below or above the market average for a prolonged period.
Comparison of a single stock net income, its P/E, and its share price against relevant market aggregated data will provide you with relative valuation insight and help to explain why the company share price may be going down, even though the corporation is performing well or the other way around, why it might go up, even though earnings are below expectations.
This chart graphs S&P 500 for the past twenty years.
When looking at the overall valuation against the P/E ratio, it is clear that the index has been highly overvalued during the dot-com bubble with price above P/E ratio.Then there was a decrease in P/E and an increase in price leading up to the financial crisis in 2007/09. From 2010 the aggregated valuation of the index has risen more steeply than the P/E ratio.
Why? Because the earnings estimate has increased.
Overall, when analyzing a company, it is important to look at all the metrics in context to its relative valuation.
