Why relative valuation is the method almost everyone actually uses
A discounted cash flow model tells you what a company is worth given a specific set of assumptions about its future. Relative valuation asks a different, often more practical question: what is the market currently willing to pay for businesses like this one, right now? Most real-world valuations — from equity research notes to the price a private equity buyer offers — lean heavily on comps, precisely because it sidesteps the hardest part of a DCF: guessing the far future.
Why median, not average
Trading multiples are right-skewed — one peer trading at an unusually rich multiple pulls a simple average up much further than it pulls a typical peer's multiple. The median is far more robust to that kind of outlier, which is why it's the standard choice when applying peer multiples rather than the mean.
Why EV-based multiples subtract net debt at the end
P/E and P/B compare market cap directly to a per-equity number (net income, book value), so they hand you an equity value straight away. EV/Revenue and EV/EBITDA compare enterprise value — the value of the whole business, debt and equity combined — to operating metrics that don't care how the company is financed. That's why the implied enterprise value from those two methods has to have net debt subtracted back out before it becomes an implied equity value: skipping that step is the single most common mistake people make running comps by hand.
The honest limitations
Relative valuation is only as good as your peer group. Include a company that isn't really comparable — different growth rate, different margins, different risk — and you'll import its mispricing into your answer. It also assumes the market has priced your peers correctly on average; if the whole sector is in a bubble, or unusually cheap, comps will faithfully reproduce that distortion rather than catch it. Use it alongside a DCF, not instead of one — our DCF valuation model is built for exactly that cross-check.