Understanding Relative Value & Absolute Value

Relative value and absolute value are two major techniques applied to value assets. Relative value compares an asset's price with other similar assets by making use of multiples such as P/E ratio or EV/EBITDA. This is perfect for short-term market analysis and finding mispriced assets. Absolute value, instead calculates an intrinsic value of a certain asset depending on future cash flows and associated risks. They commonly apply approaches like Discounted Cash Flow, so they more readily apply in the evaluation of long-term investment. Both are different, wherein the relative value has the quicker and simpler evaluation process but maybe less considering fundamental grounds, and the absolute value, though highly reliable in value appraisal, involves too much of assumption.