Abstract:Choosing relative companies is the key point of relative valuation. This paper defines relative companies using factor analysis and extraction method, and advices to use the valuation index of relative companies’ in order to enhance the effectiveness of valuation. And then, this paper approves that this approach can really enhance the effectiveness of valuation, and indicates that: (1) The effectiveness and reliability of valuation increase as the comparability of relative companies increases. (2) As the comparability of relative companies increases, risk factor will play a less important role in valuation, however profitability factor and growth factor will play more significant roles.