Relative Valuation — Peer Comps

In a world where absolute valuation models such as discounted cash flow calculations depend on many assumptions, relative valuation offers a more market-grounded and practical alternative. The method rests on the principle that similar companies, in the same industry and with similar growth prospects, should trade at similar valuation multiples. By identifying a group of comparable companies and analyzing how the market values them in relation to financial ratios such as P/E, EV/EBITDA or P/S, an analyst can establish a value range for the target company.

This makes it possible to identify potentially overvalued or undervalued companies, regardless of whether they are in themselves 'cheap' or 'expensive' in absolute terms.

The key to successful relative valuation lies in carefully defining and selecting the right peer group. An incorrect or uneven comparison can lead to misleading conclusions. It requires not only industry segmentation but also an assessment of the companies' business models, growth factors, profitability and financial structure.

A peer group containing companies that differ completely in risk profile or capital structure undermines the whole purpose of the analysis. That is why the process of identifying and quality-reviewing the comparables is just as important as the calculation of the valuation multiples itself.

The process begins with defining a relevant and homogeneous peer group for the target company, for example other Swedish banks, Nordic retailers or global software developers. Financial data is then retrieved for both the target company and all the comparables, including share price, market value, EV, revenue, EBITDA and operating profit. With this data, a set of financial ratios is calculated, typically P/E, EV/EBITDA, P/B and P/S, for each company in the group.

The multiples are then sorted and analyzed to identify a 'value range' – that is, the multiples at which the majority of the comparables trade. By comparing the target company's current multiples with this range, the analyst can draw conclusions about whether the stock is overvalued, correctly valued or undervalued relative to its peers.

An advanced aspect of practical application is the use of scatter plots to visualize the relationship between different financial ratios and growth, e.g. EV/EBITDA against growth in EBITDA. This makes it possible to identify deviations and potential valuation gaps. Finally, the results are presented in a clear format, often with a table summarizing the various valuation multiples for the peer group and marking where the target company stands in relation to the group.

This provides a concrete and easy-to-grasp picture of the stock's relative attractiveness.