what is relative value 
relative value is a method of determining an asset s worth that takes into account the value of similar assets this is in contrast with absolute value which looks only at an asset s intrinsic value and does not compare it to other assets the price to earnings ratio p e ratio is a popular valuation method that can be used to measure the relative value of stocks understanding relative valuevalue investors examine the financial statements of competing companies before deciding where to invest their money they look at relevant footnotes management commentary and economic data to assess the stock s value relative to its peers steps in relative valuation may include benefits of relative valuationinvestors must always choose among the investments that are actually available at any given time and relative valuation helps them to do that by 2019 it was easy to look back at the prices of most u s stocks in 2009 and realize that they were undervalued however that does not help one to choose better investments today that is where a relative valuation method like the stock market capitalization to gdp ratio shines the world bank maintains data on stock market capitalization as a percentage of gdp for many nations covering several decades with u s stocks near record highs in terms of stock market capitalization as a percentage of gdp in 2019 stocks in most other countries were relatively inexpensive investors must always choose among the investments that are actually available at any given time and relative valuation helps them to do that criticism of relative valuationthe primary flaw of relative valuation is that it may condemn investors to making the best of a bad situation when limited to a single asset class relative valuation can do little more than reduce losses in extreme circumstances for example value funds generally did much better than the s p 500 during the 2000 2002 bear market unfortunately most of them still lost money relative valuation vs intrinsic valuationrelative valuation is one of two important methods of placing a monetary value on a company the other is intrinsic valuation investors might be familiar with the discounted cash flows dcf method for determining the intrinsic value of a company while relative valuation incorporates many multiples a dcf model uses a company s future free cash flow projections and discounts them that is achieved by using a required annual rate eventually an analyst will arrive at a present value estimate which can then be used to evaluate the potential for investment if the dcf value is higher than the cost of the investment the opportunity may be a good one an example of relative valueconsider the following table of financial information comparing microsoft to other technology firms companymarket capitalization millions net income millions price to earnings pe ratiomicrosoft 666 154 22 11330 5oracle 197 500 9 91320 5vmware 52 420 1 18646 8based on the above relative value analysis results microsoft is overvalued relative to oracle however microsoft is also undervalued relative to vmware 