Valuation can feel intimidating when you first encounter it. There are formulas everywhere, specialized jargon, and spreadsheets packed with assumptions. Yet underneath all that, you are mostly trying to answer one simple question: “What is this business really worth, and what am I paying for it today?” At Baptista Research, much of the daily work revolves around that question. We move between intrinsic value calculation, market-based valuation shortcuts, and common-sense reality checks. You can approach it the same way without turning into a full-time analyst or quant.
In this guide, we will walk through how investors think about intrinsic value, how relative valuation works in practice, and how tools like comparable company analysis, EV/EBITDA, EV/EBIT, price to book, and tangible book value fit into a single mental framework. The idea is not to bury you in formulas. Instead, the goal is to give you a practical way to connect business economics with numbers on a screen. Once you have that mental model, it becomes easier to decode stock pitches, headlines, and research notes, because you know what sits behind the valuation language.
What Is Intrinsic Value Calculation In Equity Investing?
When investors talk about intrinsic value, they are usually asking what the business is worth based on its own cash flows, independent of market mood or peer multiples. You are not asking what comparable stocks trade at; you are asking what stream of cash this specific company can produce and what that stream is worth today. In other words, intrinsic value ties value directly to the cash the business can reasonably generate over time, rather than to where the sector happens to be trading this quarter.
The classic tool for this is discounted cash flow analysis. You project free cash flow to equity or to the firm over a number of years and then discount those cash flows back to the present using a rate that reflects risk. That present value is your model-driven value. If the implied intrinsic value sits comfortably above the share price, the stock may be undervalued; if it sits below, the stock may be overvalued. The spreadsheets can look complex, but the underlying logic is straightforward: you are exchanging a series of future cash flows for a price today and checking whether that trade makes economic sense.
In practice, any intrinsic value calculation rests on three major building blocks. First, you need a view on revenue growth: how big can this business get, and how quickly? Second, you need assumptions around margins, reinvestment, and capital intensity, which determine how much cash actually makes it to shareholders. Third, you must set a discount rate and terminal growth profile that reflect risk and maturity. Small tweaks to any of these levers can move intrinsic value a lot. That is why Baptista Research thinks of intrinsic value calculation as a range rather than a single magic figure; you are framing the economics, not predicting the exact future.
This kind of discounted cash flow analysis becomes especially powerful when there are few truly comparable peers. Think about a niche software company with a unique business model or a firm operating in a very specific sub-industry. In those situations, relative valuation may be noisy because the usual peer group does not share the same economics or risk profile. Intrinsic value work forces you to focus on normalized cash generation rather than headline multiples. It is also useful in event-driven situations such as divestitures, spin-offs, or major capital structure shifts, where old trading comps can break down overnight. In those cases, we will often lean on intrinsic value calculation as a sanity check on the economics implied by a deal.
Relative Valuation Versus Intrinsic Value: When To Use Each
If intrinsic value calculation works from the inside out, relative valuation approaches the problem from the outside in. In this case, you start by asking how the company trades compared with similar businesses. Instead of forecasting every line of a cash flow statement, you use market-based valuation shortcuts such as earnings multiples, sales multiples, and sector-standard ratios. These shortcuts reflect what investors are currently willing to pay for a given set of fundamentals.
Relative valuation is quicker to run than a full intrinsic value model and far easier to communicate in a sentence or two. Saying that a stock trades at a discount to peers on EV/EBITDA is much simpler than walking someone through a full discounted cash flow analysis. That is why relative valuation appears everywhere in Wall Street reports and in Baptista Research coverage. It gives you an immediate sense of how the market scores a company versus its peer group, even if you have not fully digested the entire business model yet.
You will tend to lean more on relative valuation when the industry has plenty of comparable names with broadly similar economics. Large consumer names, stable industrials, or mature software groups usually fit that description. When earnings are relatively steady and capital structures are not too exotic, peer comparison and trading comps can give you a useful first-pass view. However, relative valuation has obvious limits. If the whole sector is overpriced, a stock can look “cheap” against its peer set and still be expensive versus its own cash flow potential. If the sector is deeply out of favor, the opposite can be true. For that reason, our team rarely uses this concept alone and prefers to cross-check it with at least a rough Intrinsic Value Calculation.
A practical way for you to think about it is this: Relative valuation tells you how the market is currently ranking the company against others, while an intrinsic value exercise tells you whether those rankings look economically justified. When you put the two together, you are less likely to be trapped by either the market’s mood or an overconfident model.
Comparable Company Analysis: Building & Using A Peer Group
Comparable company analysis is the main workhorse behind most Relative valuation. In simple terms, you identify a peer group of similar companies, calculate their trading multiples, and then apply those valuations to your target. The basic toolbox typically includes EV/EBITDA, EV/EBIT, price to book, price-to-earnings, and sometimes revenue-based measures. Comparable company analysis sounds straightforward, but the quality of your output depends heavily on how you define “similar.”
When Baptista Research builds a peer group, the team looks at sector, business model, size, growth, and profitability, rather than just industry labels. Two companies may both sit in the “tech” bucket but operate in completely different niches with very different risk and margin structures. For Comparable company analysis to be meaningful, your peer group must share similar economic drivers, capital intensity, and cyclicality. Otherwise, the resulting Relative valuation will be more noise than signal.
In practice, you often start Comparable company analysis with a wide universe of names and then narrow it down. You drop companies that are at a radically different stage in their life cycle, such as early-stage high-growth stories in a group of mature incumbents. You strip out one-off special situations, such as firms going through restructurings or major regulatory shocks. By the end of this process, you want a focused peer set where EV/EBITDA, EV/EBIT, price to book, and other metrics are logically comparable.
Once that peer set is in place, you calculate the key multiples for each name and look at the distribution. Median values usually matter more than simple averages because a single outlier can skew the mean. Comparable company analysis then becomes about positioning your target within that distribution: is it trading at a premium on EV/EBITDA relative to most peers, or sitting near the low end on price to book? From there, you can ask whether those differences make sense based on growth, margins, risk, and capital structure. You might assign a premium multiple to a firm with superior returns and lower leverage or apply a discount to a business with weaker governance and more volatile earnings. The framework is quantitative, but the fine-tuning always involves judgment.
How EV/EBITDA Is Used To Value Cash-Generating Businesses
One of the most widely used tools in Relative valuation is EV/EBITDA, which compares a company’s enterprise value with its earnings before interest, taxes, depreciation, and amortization. Because enterprise value includes both equity and net debt, EV/EBITDA looks at the worth of the entire business rather than just the equity slice. Investors like this multiple because it creates a cleaner comparison across companies with different capital structures and different historical capex paths.
When you focus on EV/EBITDA, you strip out depreciation and amortization, which can be heavily influenced by accounting choices or prior deal activity. For many mature companies with predictable cash flows, the EBITDA multiple serves as a rough but useful cash flow proxy. That is why you will see EV/EBITDA quoted constantly for telecoms, utilities, many industrials, and stable service businesses. Baptista Research often leans on this multiple for sectors where operating margins are relatively stable and where debt levels and cash taxes are well understood.
However, you should remember that EV/EBITDA is still a shorthand, not a substitute for a full Intrinsic Value Calculation. The multiple ignores capital expenditure requirements, which can differ dramatically across firms with similar EBITDA profiles. Two companies can both trade on the same EV/EBITDA level, even though one needs heavy ongoing investment just to stand still and the other converts most of its EBITDA to free cash flow. The ratio also does not capture working capital swings, cash tax leakage, or one-off items. That is why our team uses EV/EBITDA as a starting point and then checks the underlying cash generation separately.
The multiple also behaves differently across business models. It can be less informative for very asset-light companies where stock-based compensation and off-balance sheet commitments matter more than depreciation, or for very asset-heavy firms where depreciation is a real economic cost. In those cases, you will usually see EV/EBITDA paired with EV/EBIT and sometimes with price to book so that investors can see how all three perspectives line up. For you as an investor or reader of research, the key is to treat EV/EBITDA as one lens among several, rather than a verdict in itself.
When EV/EBIT Can Be More Insightful Than EV/EBITDA
Although EV/EBITDA tends to dominate valuation discussions, EV/EBIT sometimes tells you more about the true economics of a business. EV/EBIT divides enterprise value by earnings before interest and taxes, which means depreciation and amortization are already deducted. That makes EV/EBIT especially relevant when those non-cash charges reflect real economic wear and tear on assets rather than just accounting noise.
In capital-intensive industries, EV/EBIT can better approximate sustainable operating earnings because it implicitly acknowledges that assets must be replaced over time. Think about heavy manufacturing, mining, airlines, or infrastructure players. In these sectors, depreciation often mirrors real long-term investment needs. EV/EBITDA might paint a flattering picture by ignoring those charges, while EV/EBIT brings them back into the valuation lens. Baptista Research will often favor EV/EBIT when comparing companies with similar asset lives and capital intensity because the post-depreciation multiple is closer to what owners actually earn after maintaining the asset base.
That does not mean you should ignore EV/EBITDA. In many cases, looking at both EV/EBITDA and EV/EBIT side by side is exactly what flags important differences. If two peers trade on similar EV/EBITDA levels but one looks far more expensive on EV/EBIT, that gap usually points toward heavier depreciation or amortization and possibly a more demanding reinvestment burden. When the two multiples diverge sharply, it is often a signal to dig into the capex profile, useful life assumptions, and acquisition history before drawing any conclusions from Relative valuation.
The main challenge with EV/EBIT is that it can become noisy when depreciation and amortization policies differ significantly across companies. Changes in accounting estimates, alternative asset strategies, or differing tax regimes can all distort comparisons. In those cases, our team typically keeps EV/EBIT as one data point, but not the only one. You can think of EV/EBITDA as a pre-capex cash flow proxy and EV/EBIT as closer to a post-capex view in mature businesses. Neither replaces Intrinsic Value Calculation, but together they can help tighten the range of plausible values and reduce the risk of leaning on a single ratio.
Price To Book, Tangible Book Value & Asset-Heavy Companies
Although earnings and cash flow multiples attract most of the attention, price to book still plays an important role in sectors where the balance sheet is central to the story. The price to book ratio compares a company’s market capitalization with its book value of equity. For banks, insurers, and some capital-intensive industrials, price to book acts as a quick sanity check on how the market is valuing net assets relative to their recorded value.
When you see a price to book ratio materially below one, the market may be signaling concerns about asset quality, future profitability, or both. A ratio materially above one often implies that investors expect the company to earn strong returns on equity over time. Baptista Research tracks price to book across cycles for asset-heavy sectors to see how confidence in returns and asset quality evolves, particularly through stress periods. Looking at long-term trends in the P/B ratio can tell you when a sector has moved from pessimism to optimism or vice versa.
The complication is that modern balance sheets hold a lot of intangible assets, especially after years of acquisitions. That is where tangible book value becomes particularly useful. Tangible book value removes goodwill and other intangibles from equity, giving you a tighter view of the hard asset value that might be left in a true downside scenario. For financials and some industrials, tangible book value can be a better anchor than reported book value because it focuses squarely on tangible equity. When our research team evaluates such companies, it is common to look at both price to book and price to tangible book value to understand how much of the valuation rests on intangible expectations.
In asset-heavy businesses, tangible book value can also shape your sense of replacement cost. If tangible book value per share looks far below what it would actually cost to rebuild the asset base, a very low price to book may not be sustainable over the long term. Conversely, if the market is paying a high multiple of tangible equity, you need to be convinced that returns on that hard asset value justify the premium. For asset-light companies, however, price to book is often less informative because the most important assets are people, code, and brand, none of which sit fully on the balance sheet. A very high price to book for such a business is not automatically a warning sign; it may simply reflect that tangible book value understates the true economic asset base.
Because of these nuances, Baptista Research tends to use price to book and tangible book value alongside cash flow based metrics rather than in isolation. In sectors where recorded assets largely drive earnings, these ratios provide a powerful cross-check on Relative valuation. When you combine them thoughtfully with EV/EBITDA, EV/EBIT, and an Intrinsic Value Calculation, you end up with a more rounded view of both downside protection and upside potential.
Blending Intrinsic Value & Relative Valuation In Practice
In real-world investing, you rarely have to choose between Intrinsic Value Calculation and Relative Valuation. Most practitioners use both. Baptista Research follows exactly this blended approach. The team starts with the economics of the business, then looks at how the market is pricing those economics against peers. You can do the same thing in your own process without adding much complexity.
A common workflow might look like this. First, you run a straightforward Intrinsic Value Calculation, usually with a transparent discounted cash flow analysis. You keep the assumptions simple, write them down clearly, and treat the output as a range rather than a precise target. Next, you perform Comparable company analysis. You define a peer set, review EV/EBITDA, EV/EBIT, price to book, and other relevant multiples, and see where your company sits relative to the group. Finally, you compare the DCF range with the values implied by those trading comps.
If the intrinsic value range is far above the market price but the stock already trades at a premium to peers on EV/EBITDA and EV/EBIT, you ask yourself what might be off. Are your growth assumptions too optimistic? Is the peer group missing key competitors? Or does the company genuinely deserve to trade at a much higher multiple because of superior economics? If, on the other hand, Relative valuation shows the company at a steep discount on price to book and tangible book value while your discounted cash flow analysis suggests modest upside, you may need to dig into asset quality and risk before calling it a bargain. The gaps between these approaches are often where the most interesting questions live.
Blending Intrinsic Value Calculation and Relative Valuation also helps you stay grounded across market cycles. In boom times, Comparable company analysis might tempt you to accept ever-rising EV/EBITDA multiples as normal. A simple intrinsic value range can remind you what cash flows actually support. In stressed markets, deeply depressed price to book and tangible book value ratios can imply dramatic long-term pessimism. A refreshed discounted cash flow analysis can show you whether that level of pessimism is justified. Over time, this blend lets you adjust to market conditions without losing the connection between price and fundamental worth.
Practical Checklist & Common Pitfalls In Valuation Work
By now, you have seen how Intrinsic Value Calculation, Relative Valuation, Comparable company analysis, EV/EBITDA, EV/EBIT, price to book, and tangible book value fit together. Before you apply them to your own ideas, it helps to keep a simple checklist in mind. Baptista Research often uses a structure like this when reviewing a new stock or revisiting an existing holding.
First, make sure you really understand the business model. How does the company make money? How cyclical are its revenues? How capital intensive is the asset base? Without answers to those questions, a discounted cash flow analysis becomes guesswork and Relative Valuation can easily mislead. Second, pick the right tools for the sector. For stable, asset-light firms, EV/EBITDA and EV/EBIT may carry more weight. For financials and other balance-sheet-driven companies, price to book and tangible book value often deserve more attention. For complex or unique stories, Intrinsic Value Calculation may have to do more of the heavy lifting, with trading comps used mainly as a cross-check.
Third, be thoughtful when building your peer set for Comparable company analysis. If the comparables do not share similar economics, the Relative Valuation output will add more confusion than clarity. Do not be afraid to keep the peer group tight or even skip Comparable company analysis when there really is no good match. Fourth, stay humble about your assumptions. Small shifts in growth, margins, or discount rates can significantly change intrinsic value outputs, just as using a single-year EV/EBITDA or EV/EBIT on a cyclical business can send misleading signals. For cyclicals, you may need normalized earnings or multi-year averages, and in crisis periods you must be careful about interpreting price to book and tangible book value when write-downs and regulatory shocks are distorting the picture.
Finally, avoid treating any one multiple as a standalone answer. EV/EBITDA without context on capex and working capital can hide big differences in cash conversion. EV/EBIT without a handle on asset lives and accounting policies can overstate or understate performance. price to book without a deep look at asset quality can mask serious risk, and tangible book value without considering off-balance sheet exposures can provide false comfort. The most effective use of Relative Valuation is as part of a broader mosaic that always connects back to cash flows, balance sheet strength, and business quality.
At Baptista Research, the mindset is simple: Intrinsic Value Calculation tells you what a stream of cash flows is worth to a rational owner, while Relative Valuation tells you what the market is currently paying for similar streams. Comparable company analysis, EV/EBITDA, EV/EBIT, price to book, and tangible book value are just different tools to translate those streams into prices. Used together, they help you read markets more clearly, understand where other investors are coming from, and keep your own decisions anchored in both fundamentals and market reality.
