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CFA Level I Exam · Relative Value Equity Valuation Approaches

Method of Comparables and Benchmarks in Equity Valuation

Updated 7 October 2026 · Fact-checked

The method of comparables values a stock by applying a benchmark multiple, such as the P/E of peers, an industry average or the stock's own history, to the company's fundamental, such as earnings. Implied value = benchmark multiple × company fundamental. It rests on the law of one price: similar assets should sell at similar prices.

Understand Method of Comparables and Benchmarks

Relative valuation values a stock by comparing it with other assets. Intrinsic (absolute) valuation, such as a dividend discount or free cash flow model, estimates value from the company's own forecast cash flows. Relative valuation asks a different question: is this stock cheap or expensive compared with similar stocks?

The logic is the law of one price. Two assets with the same cash flows and risk should sell for the same price. If a stock trades at a lower multiple than a truly similar peer, it may be undervalued. This holds only if the two really are similar, so the choice of peers matters more than the arithmetic.

The method of comparables uses a benchmark value of a multiple. Common benchmarks are: the average or median multiple of a peer group of close competitors, the multiple of the industry or the wider market index, and the company's own historical average multiple (a time-series comparison). You multiply the benchmark multiple by the company's own fundamental (EPS, book value per share, sales per share, EBITDA) to get an implied value. Then you compare it with the market price.

Good comparable companies share business mix, size, growth prospects, risk, and accounting policies. In practice, analysts start from an industry classification, then check revenue sources, sensitivity to the economy, and financial profile. A peer group should be reasonably sized, and extreme values (outliers) can distort an average, so the median is often more robust.

A multiple that differs from the benchmark is not automatically a mispricing. It may be justified by higher growth, lower risk, or different accounting. A stock at a premium may deserve it. Using the company's own history assumes its growth and risk are roughly unchanged. The method also inherits market mispricing: if the whole peer group is overpriced, relative valuation will not reveal it. Advantages are speed and market-based inputs. Weaknesses are that it can embed market errors and hide differences in fundamentals.

Key formulas to remember

Implied value from a multiple
Implied value per share = Benchmark multiple × Company's fundamental per share
For P/E: implied price = benchmark P/E × EPS. For P/B use book value per share; for P/S use sales per share.
Implied enterprise value
Implied EV = Benchmark EV/EBITDA × Company EBITDA
Then equity value = EV − net debt (debt minus cash and equivalents), adjusting for other claims such as preferred stock and noncontrolling interest.
Valuation conclusion
Price < implied value → possibly undervalued; Price > implied value → possibly overvalued
Only valid if the benchmark is a fair comparison and differences in growth and risk are considered.
Law of one price
Identical cash flows and risk → same price
Basis of relative valuation. Real stocks are never identical, so judgement is needed.

How to solve Method of Comparables and Benchmarks questions

Use this sequence for any question on comparables and benchmarks.

  1. 1Identify the multiple and the fundamental it applies to (for example P/E with EPS, or EV/EBITDA with EBITDA).
  2. 2Identify the benchmark: peer group, industry or index, or the company's own history. Check whether the question asks for mean or median.
  3. 3Check comparability: business mix, growth, risk, size and accounting. Note any difference that would justify a higher or lower multiple.
  4. 4Compute the benchmark multiple if needed. For a median, sort the values; with an even count, average the two middle values.
  5. 5Multiply the benchmark multiple by the company's fundamental to get the implied value. For EV multiples, subtract net debt to get equity value, then divide by shares.
  6. 6Compare implied value with the market price and state under- or overvaluation, noting any justified premium or discount.
  7. 7Pick the answer that matches the logic and is listed in the right order; eliminate options with the wrong direction or a misused fundamental.

Quickest way: Multiple × fundamental, then sanity-check

When to use it: For numerical items where a benchmark multiple and company data are given.

  1. Write multiple × fundamental on your scratch space immediately.
  2. For EV items, subtract net debt before dividing by shares.
  3. Compare with the market price: implied above price means undervalued.
  4. For concept items, eliminate any option that ignores differences in growth, risk or accounting, or claims relative valuation is always better than intrinsic.

Common mistakes in Method of Comparables and Benchmarks

  • Treating a lower multiple than peers as proof of undervaluation.

    The law of one price feels like a guarantee.

    Fix: Ask whether growth, risk or accounting differences justify the gap. The law applies only to truly similar assets.

  • Forgetting to subtract net debt when using EV/EBITDA.

    The implied EV looks like a price.

    Fix: EV is the value of the whole firm. Subtract debt, add cash, then divide by shares.

  • Using the mean when extreme outliers are present.

    The mean is the default average.

    Fix: Remember the median is less affected by outliers, and use whichever the question specifies.

  • Assuming the company's own history is a good benchmark in any situation.

    Past multiples feel objective.

    Fix: Historical multiples assume stable growth, risk and business mix. A merger, new strategy or rate shift weakens them.

  • Confusing relative and intrinsic valuation.

    Both produce a value per share.

    Fix: Intrinsic uses the company's own forecast cash flows and discount rate; relative uses market prices of other assets.

  • Applying a multiple to the wrong fundamental.

    Several per-share figures are given in the stem.

    Fix: Match the denominator: P/E with EPS, P/B with book value, P/S with sales.

Worked examples

Example 1

A company has EPS of $2.50. Four peers trade at P/E multiples of 12, 14, 16 and 30. The analyst uses the median peer P/E. The company's shares trade at $38. What is the implied value, and what does it suggest? (A) $35, overvalued; (B) $37.50, overvalued; (C) $45, undervalued.

Show the solution
  1. Sort the multiples: 12, 14, 16, 30.
  2. With four values, the median is the average of 14 and 16 = 15.
  3. Implied price = 15 × $2.50 = $37.50.
  4. Market price $38 is above $37.50, so the stock looks slightly overvalued.
  5. Eliminate A because $35 = 14 × $2.50. It uses only the lower of the two middle values (14) instead of averaging 14 and 16. Its direction (overvalued) happens to match, but the value is wrong. Eliminate C because $45 = 18 × $2.50. It uses the mean peer P/E of 18, which the outlier of 30 pulls up, instead of the median of 15. It also gives the wrong direction.

Answer: B: implied value $37.50, slightly overvalued versus the $38 price.

Example 2

A firm has EBITDA of €200 million, net debt of €300 million and 50 million shares. The peer median EV/EBITDA is 8.0. What is the implied value per share? (A) €20; (B) €26; (C) €32.

Show the solution
  1. Implied EV = 8.0 × €200 million = €1,600 million.
  2. Equity value = EV − net debt = €1,600 million − €300 million = €1,300 million.
  3. Per share = €1,300 million ÷ 50 million = €26.
  4. A (€20) is a plausible distractor from subtracting net debt twice: (1,600 − 600) ÷ 50 = €20, which double-counts net debt. C (€32) divides EV with no net debt deduction (1,600 ÷ 50).

Answer: B: €26 per share.

Exam tips

  • Check which benchmark the question uses: peers, industry or own history. Each has a distinct weakness the exam may test.
  • Expect conceptual items on the law of one price and on why a multiple premium might be justified.
  • For EV multiples, always move from EV to equity value before the per-share figure.
  • With three options, estimate the answer roughly first and eliminate distractors that skip net debt or reverse the direction.

Practice questions from Relative Value Equity Valuation Approaches

Method of Comparables and Benchmarks in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Method of Comparables and Benchmarks: frequently asked questions

What is the difference between relative and intrinsic valuation?

Intrinsic valuation estimates value from the company's own forecast cash flows and required return. Relative valuation compares the stock's multiples with a benchmark such as peers. Relative valuation is faster but inherits any mispricing in the benchmark.

How do you choose comparable companies?

Choose firms with similar business mix, size, growth, risk and accounting policies, usually starting from an industry classification. Then check that revenue sources and economic sensitivity match. A clean, reasonably sized peer group gives a more reliable benchmark.

What is the law of one price in relative valuation?

It says assets with the same cash flows and risk should trade at the same price. Analysts use it to argue that a similar stock trading at a different multiple may be mispriced. Real companies differ, so the conclusion needs judgement.

Should I use the mean or the median of peer multiples?

Use what the question asks. In practice the median is often preferred because outliers affect it less than the mean.