Learn Relative Valuation from Aswath Damodaran of the Stern School of Business at New York University

If you are at the beginning of your journey to learn business valuation, my recommendation is to start with an expert and learn from them. Aswatch Damodaran teaches business valuation courses at the Stern School of Business at New York University.

This article is a continuation of the videos that Professor Damodaran recorded about business valuation from YouTube. I highly recommend to you to take the time to watch and listen to these videos as his approach to learning the art of valuation is excellent and rational.

This series is about the art of Relative Valuation, which essentially uses comparable multiples against similar metrics. The relative valuation method values a company based on how similar business are trading at (including in mergers). This is one of three types of business valuations you can do.

As a refresher, here is the first video in the series talking about the three types of valuations.

Now that you are grounded again as to what kind of valuations to do on what kind of businesses, here is the first session in this series introducing the first principles of relative valuation (video 14).

The second session in this series (video 15) talks about whether or not to use the PE ratio as a basis for relative valuation. This is a very important video because the PE ratio is the most discussed market-pricing ratio discussed in the world.

With a grounding in understanding these ratios, Professor Damodaran discusses other earnings multiples and how to think about them in video 16.

Book value is a very important metric when looking at a business. Some businesses are so complex, like Berkshire Hathaway, that they can really only evaluated on a relative value basis by looking at book value. This 17th video discusses this concept.

After the above videos discussing accounting and how they impact the ratios that people use in valuation. This next 18th video is about revenue multiples and how to think about them in terms of their relationship to operating margins.

These videos will give you a grounded understanding of what a relative valuation is and how to approach it. My recommendation is to take a company and attempt a valuation using this method. Do twenty companies using this method and you will have a working knowledge about this method of valuation.

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of BurgeĆ³n Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

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