1. Submitted By –
Ankita Nagarkoti
ankita.nagarkoti@gmail.com

2. Relative Valuation
 Valuation is a generic term that refers to the notion of comparing
the price of an asset to the market value of similar assets.
 Valuing peer companies in the same industry
 Valuation by historical data
Disadvantages
 Peers may not be valued correctly
 Assumption that historically, average of past is a good indicator

3. Relative Valuation Method
•Price multiples & enterprise value multiples
•Trailing multiples & Forward multiples
Methods
–Based on comparables
–Based on forecasted fundamentals (justified
multiple)

4. Price Multiples
 Price to earnings
 Price to book value
 Price to sales
 Price to cash flow
 Dividend yield

5. EPS Adjustments Required
Adjust for potential EPS dilution and non-recurring
Earnings.
Dealing with very low or negative EPS – EPS not
meaningful, use normalized EPS, or use earnings yield for
ranking.
Cyclicality in earnings – use normalized EPS
BV – Book Value
ROE – Return on Equity
EPS(normalised) = ROE * BV

6. Justified P/E
•P0/E0 = (1-b)(1+g)/(r-g)
•P/E increases with growth
b – Earning Retention Ratio
g – Substantial rate of growth
b = (1 – Dividend Payout Ratio)
P0/E1 = (1-b)/(r-g) = (1-b)/(r-RoExb)

7. Present Value of Growth Opportunities
 The first term indicates the component in case of no growth
and second term indicates the component related to growth
opportunities.
V0 = E1/r + PVGO

8. Enterprise Value Multiples
Unlike EPS, EBITDA controls for effects of depreciation &
amortization. However, unlike free cash flows it does not take into
account cash flows due to working capital changes or capex.
EV = MV of equity + MV of preferred equity + MV
of debt – Value of cash and marketable securities