Comparable Firms Determination at Relative Valuation

Relative valuation is one of most common asset valuation methods via comparison of similar firms. Because of real data utilization, it is thought that market price is obtained by relative valuation. Easy understandability and applicability are two of the most important reasons of common use. However, the method contains some disadvantages which are related with both theory and application. Relative valuation does not take care of some fundamental variables such as risk, growth and cash flows as well does not have obvious assumptions. While these problems are related with the theory, selection of wrong comparable firms is one of the most important errors related with the practice. However, correct multiple design is necessary for proper application. In this article, we try to explain determination of comparable firms to minimize errors based on misapplication.