The idea
You pick companies whose business resembles the one you are studying: same activity, a not-too-different size, similar customers. Then you calculate one multiple for them, such as P/E, and see where your company sits among them. Use the same basis of multiple for every company: trailing with trailing or forward with forward, and the same accounting period as far as you can.
The median (the middle figure once they are sorted) is usually safer than the average, because one company with an odd multiple can drag the average.
A worked example
An invented company trades at EGP 12 with EPS of 1.60, so its P/E is 12 ÷ 1.60 = 7.5. It has three peers in the same business, with P/E ratios of 8, 10 and 13.
Valued at the peer median, the estimate would be 1.60 × 10 = EGP 16, against a price of 12.
What does the gap mean?
The right question is not "is it cheap?" but "why does the market value it lower?". Its debt may be higher, its profits may be shrinking, this year's profit may include something one-off, or its shares may trade thinly. Or there may be no clear reason. Relative valuation shows you the gap; it does not explain it.
Start from the sector
Open the sectors page and pick a sector to find companies whose businesses really are alike, then compare their P/E in the stock screener or on each stock page.
Check yourself
1. Peer P/E ratios are 6, 9 and 20. What is the median?
2. EPS EGP 2 and peer median 9. What is the relative estimate?
Summary
- Pick peers with a similar business and take the median of their multiple.
- Estimate = the company's EPS × the peer median P/E.
- A gap from peers is a question that needs explaining, not a ready-made opportunity.