Relative Valuation Tool

What is Relative Valuation?

Relative valuation is a method used to value a company by comparing it to other similar companies (peers). It relies on ratios like **P/E (Price to Earnings)**, **P/B (Price to Book)**, and **ROE (Return on Equity)** to determine if a stock is overvalued or undervalued compared to the industry average.

Key Metrics to Compare

• P/E Ratio: Tells you how much investors are willing to pay for every ₹1 of earnings. A lower P/E than peers *might* indicate an undervalued stock.
• ROE (Return on Equity): Measures how effectively a company uses its shareholders' money to generate profit. A high ROE (above 15-20%) is a sign of a high-quality business.
• Industry Average: This is the benchmark. A stock trading at a significant premium or discount to its industry average requires careful investigation.

The Value Trap

Be careful of "Value Traps"—stocks that look cheap based on low P/E ratios but are actually struggling businesses with declining earnings. Always look for a combination of **Low Valuation** and **High Quality (ROE)** to find true wealth creators in the Indian market.