F5 - Relative Valuation - chapter 17 and 18
Instruction to relative valuation…
Regression analysis
- Financial Econometrics is the application of statistical and mathematical
methods in solving finance-related problems.
- It is different from other econometrics methods.
- Regression Analysis is probably the most important statistical tool for
Financial Econometrics
Data Types (three types)
- Time series - Daily prices
- Cross sectional - PE ratios for 10 Fintech companies
- Panel - PE and PEG ratios for 10 Fintech companies over last 5 years
Relative Valuation - Comparing the value of an asset to the values assessed by the
market for similar assets.
- Comparable assets → the market for similar assets
- Price multiples → the standardized market values
- Differences → controlling for differences between the assets
affecting the multiple
We need to use the regression model to compare.
- Most equity valuations on wall street are relative valuations.
- While there are more discounted cash flow valuations in consulting and
corporate finance they are often relative valuations.
Relative valuation is a firm valuation method which compare a firms value to that of
its competitors to determine the firms financial worth
Relative valuation models are used as an alternative to absolute value model.
Multiples are just standardized estimates of price …
Examples for the numerator:
, Examples for the denominator:
Steps to De-constructing Multiples
Is the multiple uniformly estimated? (consistent)
- trailing PE ratio
- 5 year trailing PE ratio
You can’t use PE ratios alone to compare quality between companies.
Trailing PE - You use past PE’s to estimate future PE
EV/EBITDA
We consider debt when using EV/EBITDA and PE don’t consider debt
- What is the average and standard deviation for this multiple, across the universe
(market)? - What is the median for this multiple?
The median for this multiple is often a more reliable comparison point.
Instruction to relative valuation…
Regression analysis
- Financial Econometrics is the application of statistical and mathematical
methods in solving finance-related problems.
- It is different from other econometrics methods.
- Regression Analysis is probably the most important statistical tool for
Financial Econometrics
Data Types (three types)
- Time series - Daily prices
- Cross sectional - PE ratios for 10 Fintech companies
- Panel - PE and PEG ratios for 10 Fintech companies over last 5 years
Relative Valuation - Comparing the value of an asset to the values assessed by the
market for similar assets.
- Comparable assets → the market for similar assets
- Price multiples → the standardized market values
- Differences → controlling for differences between the assets
affecting the multiple
We need to use the regression model to compare.
- Most equity valuations on wall street are relative valuations.
- While there are more discounted cash flow valuations in consulting and
corporate finance they are often relative valuations.
Relative valuation is a firm valuation method which compare a firms value to that of
its competitors to determine the firms financial worth
Relative valuation models are used as an alternative to absolute value model.
Multiples are just standardized estimates of price …
Examples for the numerator:
, Examples for the denominator:
Steps to De-constructing Multiples
Is the multiple uniformly estimated? (consistent)
- trailing PE ratio
- 5 year trailing PE ratio
You can’t use PE ratios alone to compare quality between companies.
Trailing PE - You use past PE’s to estimate future PE
EV/EBITDA
We consider debt when using EV/EBITDA and PE don’t consider debt
- What is the average and standard deviation for this multiple, across the universe
(market)? - What is the median for this multiple?
The median for this multiple is often a more reliable comparison point.
