Relative valuation says we need to calculate a multiple That multiple is going to be some kind of value divided by some kind of value driver If we take an example, a good metric or measure of value is a company's share price And I now ask myself, what drives the value of the share price? Well earnings per share is a great value driver for a share price The earnings attributable out to shareholders is what our shareholders could in theory get So the higher the earnings per share, the higher the share price Now if I've got two company's that are very similar (company A, company B) And I found out that company A had this P/E ratio (share price over earnings per share) If company A had this P/E ratio of 10, then you could say "well I think company B should have a P/E ratio of 10 as well" So I could take company B's value driver (its earnings per share), times it by 10 And I could thus work out a theoretical value for B, a theoretical share price Thus our aim is to establish what multiple of earnings (or other important metric) similar assets trade at Companies A and B probably have the same multiple Now that value driver must be consistent with the value number. We took the earnings per share here and we said that drove share price If I was to say that the share price was driven by revenues, that probably is not a consistent number We've got many other things that happen between revenues and the money that can actually be paid out to shareholders Things like costs, things like interest, things like tax Getting comparable numbers and calculated a multiple in a completely consistent way is what we're trying to do here So we'll calculate the value in the same way, we'll calculate the value driver the same way Thus work out multiples for a range of different companies And lastly our valuation is forward looking. So earnings or that value driver should be normalized We want to get rid of any non-recurring items from the past Things that happened just as a one off we thus need the underlying earnings that are going to continue into the future