Relative valuation (P/E, EV/EBITDA, P/B, EV/sales)

Relative valuation prices a company by comparing it to similar companies or recent transactions. Rather than estimating the intrinsic value from first principles, you ask: what are other businesses like this selling for, and does this company look cheap or expensive relative to them?

It's like pricing a flat in a Mumbai suburb by looking at recent comparable sales rather than computing the net present value of future rental income. Faster, more intuitive, and anchored to what the market is actually paying.

The limitation is that the entire peer group may be mispriced. In a frothy market, even a "cheap" stock on a relative basis may be expensive in absolute terms. Relative valuation tells you where a company stands in the pack, not whether the pack's pricing makes sense.

Common multiples and their uses:

P/E (Price-to-Earnings) P/E = Market Price per Share ÷ EPS Most widely used. Suitable for profitable, mature companies. Can be trailing (last 12 months EPS) or forward (next 12 months consensus estimate). Doesn't work for loss-making companies.

EV/EBITDA EV = Market Cap + Net Debt + Minority Interest − Associate Value EV/EBITDA = Enterprise Value ÷ EBITDA Capital-structure neutral, great for comparing companies with different leverage. Most useful for industrial, consumer, and media companies.

P/B (Price-to-Book) P/B = Market Cap ÷ Net Worth (Book Value of Equity) Used for banks, NBFCs, and capital-intensive businesses. Meaningless for asset-light businesses with low book value.

EV/Sales Used when earnings are negative or highly variable (high-growth startups, cyclical troughs). A blunt instrument.

When to use which:

• Software / IT services: EV/Sales, EV/EBITDA, P/E
• Banks / NBFCs: P/B, P/E
• Infrastructure / capital-heavy: EV/EBITDA
• Cyclical at trough: EV/Sales or EV/replacement cost