RELATIVE VALUE: ER. AVINASH KULKARNI

Saturday Brain Storming Thought (212) 02/03/2024

RELATIVE VALUE

Relative Value is a measure that compares the price, worth or value of one asset to another asset

In marketing, relative value is used to compare the value of one product or service to its competitors

Key Takeaways of Relative Value

1) Relative Value looks of an asset’s worth by comparing it with the value of similar assets

2) Relative Value methods allow investors and analysts to make better apples to apples comparisons across potential investments

3) One major flaw in using relative valuation is that it may pigeonhole investors to select the best among poor or mediocre choices rather than searching elsewhere

Steps in Relative Valuation

1) Identifying comparable assets and corporations

2) It can be useful to view market capitalisations and revenue or sales figures

3) Their stock prices represent how the market values comparable companies at any given time

4) Deriving price multiples from these initial figures

5) Price to sale ratios

6) comparing these multiples across a company’s peer or competitor group to determine if the company’s stock is undervalued relative to other firms

Use of Relative Value in finance and investment

Relative Value is used in finance and investment to compare the value, price and yield of different assets to determine which one are undervalued or overvalued

By investing in undervalued assets, investors can generate higher returns in the long run

Absolute Value and Relative Value

Absolute value refers to the actual price, worth or value of an asset

Relative Value compares the value of one asset to another asset

Relative Value Metrics

It is calculated by dividing the stocks price byvits earnings per share (EPS)

Relative Value function

The relative value function returns comparative values of an expression

The function returns these values independently of the layout of a report

Relative Value theory

Relative Value theory attributes a reinforcer’s effectiveness to its probability relative to other behaviours

Relative Value products

Absolute value quantifies how well a product meets customer needs

Relative Value puts the product value in the perspective of the available solution alternatives

Understanding both is critical to making the right product decisions

Relative Value costing

Relative Value costing can be used to determine the cost to produce given services and determine appropriate physician fees

Relative Value of growth

Relative Value of growth (RVG) metric expresses the value of an extra percentage point of growth as a multiple of the value of a percentage point increase in a company’s operating profit margin

The higher the multiple, the more valuable growth is to a company

Relative value of fixed income

A relative value manager looks to exploit inefficiencies in the pricing of fixed-income securities by making bets on the relative rather than absolute value of government bonds, agencies or corporate debt securities, and their ralated derivatives

Relative Value in multi strategy

Multi Strategies employ an investment thesis is predicated on realisation of a spread between related yield instruments in which one or multiple components of the spread contains a fixed income, derivative, equity, real estate, MLP or combination of these or other instruments

Advantages of Relative Valuation

1) It is easy to understand and apply

2) It is flexible and can be used with any type of business or industry

3) It does not require a lot of information about the company or it’s industry

4) It does not require much time from management and analysis

5) There is no need for an analysts opinion on projected growth rates, earnings or cash flow

Disadvantages of Relative Valuation

1) It does not account for growth potential or profitability – only dilution from previous rounds

2) It assumes that all companies are equal in terms of quality and growth potential (which is not true)

3) The challenge with this method is that it requires market research and analysis to determine which companies are truly comparable to yours

4) The relative valuation method is only as good as the comparable you use

5) If you use a bad comparable, your valuation will be inaccurate