4.1. Relative vs. Direct Valuation Methods

A relative valuation method assesses a company’s value compared to its peers, relying on valuation multiples such as P/E or EV/EBITDA. A company’s multiple is typically compared to either the average multiple for the sector, or to a group of peers. This comparison is used to gain insight into whether the company is priced fairly relative to other companies in its peer group. The first two valuation methods described below, comparable companies analysis and precedent transactions analysis, are both relative valuation methods. Relative valuation is sometimes known as benchmarking.

Results from a relative valuation method have to b