Fundamental Analysis

Comparables model

1

Earlier on in this course, we discussed P/E ratios and P/B ratios. Both of which are quick tools that can be used to contrast the price of a stock with the underlying performance of the company.

2

Both of these ratios are known as multiples and then can be utilized in a valuation model called the comparables model. the main concept is that stocks from a similar category should be priced in a similar way.

3

For example, an investor could compare the value of technology stocks. If there are significant differences between stocks, it may indicate that one of them is a worthwhile investment.

4

In the comparables model, investors would select different ratios that they want to use to compare different companies. The most common are the P/E ratio and the P/B ratio – which we have already covered.

Test your knowledge...

1. How much can you expect to earn from a cash investment?

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