When it comes to investing, knowing the true worth of an asset is half the battle. While there are many ways to value shares, property, and other investments, the relative valuation model stands out as a practical tool for comparing similar assets and making more informed decisions. In Australia’s fast-evolving 2025 market, understanding how this model works could give you a crucial edge—whether you’re a DIY investor, a financial adviser, or simply keen to decode the numbers on your favourite stocks.
What is the Relative Valuation Model?
The relative valuation model is a method of estimating the value of an asset by comparing it to the valuation multiples of similar assets. Unlike absolute valuation methods (such as discounted cash flow, which focus on intrinsic value), relative valuation draws on real-time market data, using ratios like price-to-earnings (P/E), price-to-book (P/B), or enterprise value-to-EBITDA (EV/EBITDA).
- Comparative focus: Looks at assets within the same sector or peer group.
- Market-driven: Reflects current investor sentiment and macroeconomic conditions.
- Widely used: Favoured by analysts, fund managers, and individual investors for its simplicity and speed.
For example, if the average P/E ratio of ASX-listed banks is 13, and one bank trades at a P/E of 10, the model suggests it may be undervalued—assuming no major red flags are present.
How Australians Use Relative Valuation in 2025
With volatile interest rates, changing tax policy, and global economic shifts, 2025 has pushed investors to sharpen their valuation techniques. The relative valuation model is especially useful in the following scenarios:
- Share Market Analysis: Retail and institutional investors compare P/E, P/B, and EV/EBITDA ratios across ASX sectors to identify undervalued or overvalued stocks.
- Property Investment: Buyers and analysts benchmark rental yields and price-per-square-metre against similar properties in the same suburb or city.
- Private Equity & Startups: Venture capitalists use revenue multiples to compare Australian tech startups with US or Asian peers, adjusting for local risk factors.
Recent regulatory changes—like the 2025 tightening of ASIC reporting standards for listed entities—have improved the transparency of company data, making relative valuation even more reliable. The widespread adoption of ESG (environmental, social, and governance) metrics is also starting to show up in valuation multiples, especially in sectors like mining and energy.
Strengths, Limitations, and Real-World Examples
Strengths:
- Quick and easy: No need for complex financial modelling—just up-to-date market data.
- Market relevance: Reflects the current economic environment and investor mood.
- Broad applicability: Useful for shares, property, and even alternative assets like infrastructure or REITs.
Limitations:
- Peer group risk: If the whole sector is overpriced (or underpriced), the model may mislead.
- Ignores fundamentals: Doesn’t consider unique company strengths, weaknesses, or growth prospects.
- Subject to short-term swings: Valuations can be distorted by temporary market factors, hype, or panic.
Real-World Example: In early 2025, Australian lithium miners saw their P/E ratios spike as global EV demand surged. An investor using the relative valuation model compared P/E ratios across the top five ASX-listed lithium stocks. While most traded at a P/E above 30, one established miner sat at 18. Digging deeper, the investor found that this company had recently resolved a regulatory dispute—suggesting the lower ratio was a temporary anomaly. This insight led to a profitable investment as the stock rebounded over the next quarter.
Best Practices for Using Relative Valuation in Australia
- Choose the right peers: Compare like-for-like assets in terms of size, growth, and risk profile.
- Use multiple ratios: Don’t rely solely on one metric—cross-check with several valuation multiples.
- Stay updated: Use the latest market data and watch for sector-wide changes in 2025, such as the impact of new tax rules on property and superannuation.
- Combine with qualitative analysis: Read company announcements, monitor policy updates, and consider macroeconomic trends.
Conclusion
The relative valuation model remains a core tool in the Australian investor’s toolkit for 2025. By benchmarking assets against their peers, you can spot opportunities, avoid overhyped plays, and respond faster to market shifts. Whether you’re scanning ASX blue chips, hunting for value in property, or assessing the next big tech startup, relative valuation helps you make more informed, confident decisions.
