Relative valuation

Every valuation is relative to something. The reverse DCF compares a price with a path; relative valuation compares it with other companies the market is pricing at the same moment. The instrument is simple arithmetic, and its honesty lives in two disciplines: the peer set is chosen and versioned in advance, and a multiple whose denominator is not positive is published as unavailable rather than as a negative number that means nothing.

What it measures#

For the subject and each peer, enterprise value is market capitalization plus net debt; the multiples are enterprise value to trailing revenue, enterprise value to trailing operating income, market capitalization to trailing free cash flow, and enterprise value to revenue divided by revenue growth. The peer medians and the subject's rank on each multiple are published beside the table. Fundamentals come from filings, converted at a stated exchange rate where a peer reports in another currency.

Assumptions#

The peer set is defined once, given an identifier and a date, and hashed, so a later change is a new version rather than a quiet edit. Trailing figures are the latest filed values, which suits a comparison made today and not a historical study. Foreign filers on an annual basis are marked as such in the table.

When it misleads#

A peer set is a judgment, and a flattering one is easy to build; publishing its definition and date is the only defence. Multiples on companies with negative operating income or negative free cash flow, which describes much of the emerging cohort, cannot be computed, and a table full of unavailable cells is telling the truth about how little relative valuation can say there. Growth-adjusted multiples reward a high growth rate whatever its quality.

How the lab uses it#

The relative-valuation section places the subject among the companies an investor would actually choose between, and the memo says whether the rank is deserved. It is the section most likely to be quiet in a dossier on a young company, and the lab leaves it quiet rather than fill it. The demo below computes the same multiples from illustrative inputs and shows how a single negative denominator empties a cell.