What is the Difference Between Intrinsic Valuation and Relative Valuation?

Intrinsic valuation and relative valuation are two methods used to determine the value of a company or asset.

Intrinsic valuation involves estimating the intrinsic value of an asset, which is the inherent value based on its fundamental characteristics, such as its earnings, dividends, and growth potential. Intrinsic valuation methods, such as discounted cash flow analysis, aim to determine the value of an asset based on its expected future performance and risk.

Relative valuation, on the other hand, involves comparing the value of an asset to other similar assets in order to determine its relative value. This can be done using methods such as comparable company analysis or multiples analysis, which involve comparing the financial metrics of the asset being valued to those of similar assets.

Overall, intrinsic valuation aims to determine the inherent value of an asset, while relative valuation compares the value of an asset to other similar assets.

Both methods can be useful in different contexts and can provide important insights into the value of a company or asset.