All valuation models

Stock analysis model

Relative Valuation Model (RVM)

Relative valuation estimates whether a stock looks expensive or cheap by comparing its valuation multiples with similar companies. Stock Insights primarily uses peer-group comparisons such as EV/EBITDA.

When RVM is useful

  • Comparing businesses with similar industries, economics and capital structures.
  • Getting a market-based valuation reference without forecasting many years of cash flows.
  • Identifying valuation outliers within an industry peer group.

Limitations to consider

  • A stock can look cheap only because its business quality or growth prospects are weaker.
  • The whole peer group may be overvalued or undervalued at the same time.
  • Results depend heavily on selecting genuinely comparable companies.

How the model works

  1. 1Select a relevant valuation multiple, such as EV/EBITDA.
  2. 2Identify comparable companies from the same industry or business segment.
  3. 3Collect the same financial multiple for the target company and each peer.
  4. 4Calculate a representative peer benchmark, such as the median or average.
  5. 5Measure the target company's premium or discount relative to that benchmark.
  6. 6Review whether differences in growth, profitability or risk justify the deviation.

How to interpret the result

A multiple below the peer benchmark may indicate undervaluation, but it may also reflect weaker fundamentals. A premium may be justified by superior growth, margins or balance-sheet quality. Relative valuation should therefore be paired with qualitative analysis.

Frequently asked questions

What is relative valuation?

Relative valuation estimates value by comparing a company's financial multiples with those of similar publicly traded businesses.

Why use EV/EBITDA?

EV/EBITDA compares enterprise value with operating earnings before financing and non-cash charges, making it useful for comparing companies with different debt levels.

Is a lower multiple always better?

No. A lower multiple can signal undervaluation, but it can also reflect lower growth, weaker profitability, higher risk or structural business problems.

Learn the method in context

Go beyond the score with worked explanations, assumptions and common mistakes in the Stock Insights Academy.

Read the related Academy guide

Apply RVM to a stock

Use Stock Insights to combine this model with additional valuation and financial health checks.

Analyze a stock