If you spend any time in equity markets, you know how quickly conversations drift toward “cheap” and “expensive.” Most of the time, those labels come from valuation multiples and market ratios. Yet many investors use these tools without really thinking through what each multiple is telling them. That is where a deeper look at EV/EBITDA, EV/EBIT, price to book, and tangible book value becomes useful.
In this guide, I want to walk you through how practitioners like Baptista Research think about valuation multiples in day-to-day equity research. We will stay practical, keep the jargon light, and focus on how you can actually use these ratios. You will see how each multiple fits into a bigger picture that includes growth, returns, leverage, and risk.
We will start with why valuation multiples matter in the first place. Then we will drill into EV/EBITDA and EV/EBIT, before turning to price to book and tangible book value, especially for financials and industrials. Finally, we will discuss how to compare multiples across companies and sectors in a way that feels coherent and repeatable.
Throughout, keep one idea in mind: these tools do not replace valuation. They summarize it. Valuation multiples and market ratios compress a full discounted cash flow view into one number you can compare in seconds. That is powerful, but it also demands discipline.
Why Valuation Multiples Matter In Equity Markets
What Valuation Multiples Really Tell Us
At the most basic level, a valuation multiple is a price tag divided by a measure of fundamental performance. Market ratios follow the same idea. You take market value in the numerator and a financial metric in the denominator. EV/EBITDA, EV/EBIT, price to book, and price to earnings all fit this pattern.
Enterprise value, or EV, represents the value of the whole business to both debt and equity holders. It usually starts with equity market capitalization, then adjusts for net debt and a few other items. When you divide EV by EBITDA or EBIT, you are asking how many “years” of operating profit the market is paying for the business.
Why They Matter In Practice
Valuation multiples matter because they give investors a common language. Two companies may sit in different countries or report under different accounting standards. A simple market ratio like EV/EBITDA or price to book gives you at least one way to line them up side by side. Analysts at Baptista Research often start this way when they screen for ideas or build a peer set.
Multiples also connect directly to expectations. A high EV/EBITDA or EV/EBIT multiple usually implies that the market expects stronger growth, higher returns on invested capital, lower risk, or some mix of those drivers. A low multiple may reflect weaker growth, lower returns, higher risk, or simply a lack of investor attention. The multiple itself does not tell you which story is correct, but it tells you that a story exists.
Signals From Market Ratios
Market ratios such as price to book create similar signals. A bank trading at 0.7x price to book, for example, sends a very different message than a bank at 1.5x. The first may be priced for stress in its loan book or poor profitability. The second may reflect confidence in its return on equity and balance sheet quality. Both are banks. The difference lies in the expectations embedded in the ratio.
Finally, valuation multiples and market ratios are practical. You can compute them quickly, use them in screens, track them through time, and plug them into simple frameworks. That is why they sit at the heart of most equity research workflows, including those at Baptista Research.
EV/EBITDA: Strengths, Weaknesses & Common Pitfalls
Definition & Core Intuition
Let us start with the workhorse multiple: EV/EBITDA. In its simplest form:
EV/EBITDA = Enterprise Value ÷ Earnings Before Interest, Taxes, Depreciation & Amortization
Investors like EV/EBITDA because it uses enterprise value in the numerator and an operating profit proxy in the denominator. Enterprise value captures both equity and debt holders. EBITDA strips out interest, taxes, depreciation, and amortization. The result is a cash flow proxy before capital structure and accounting choices. When you hear people talk about “ev/ebitda screens” or “the EBITDA multiple,” this is what they mean.
Key Strengths
The strengths are clear. EV/EBITDA is capital structure neutral. You can compare a leveraged telecom company with a low-debt peer because both are measured at the enterprise level. The metric also ignores depreciation and amortization, which means accounting differences around asset lives or historical capex do not dominate the picture. That is especially useful in capital-intensive sectors like utilities, industrials, telecom, and traditional media. Private equity firms also use EV/EBITDA heavily in buyout models and deal comps.
Weaknesses & Adjustments
However, EV/EBITDA has real weaknesses. EBITDA adds back depreciation and amortization, but the assets that generate revenue still wear out over time. A company can look cheap on EV/EBITDA but require heavy ongoing capital expenditure just to stand still. In those cases, the multiple may overstate the business’s true cash-generating power. This is one reason some investors prefer EV/EBIT or even free cash flow yields when they want a closer link to economic reality.
Another issue is that EBITDA is easy to “adjust.” Companies often present “adjusted EBITDA” that removes restructuring charges, stock-based compensation, or other items. Some adjustments are reasonable; others are aggressive. If you use EV/EBITDA blindly, you may be comparing one firm’s conservative EBITDA with another’s heavily adjusted version. That can distort any ev/ebitda comparison you run.
Enterprise Value Pitfalls
There are also pitfalls around the numerator. Enterprise value should reflect net debt, but you also need to think about leases, pension deficits, contingent liabilities, and minority interests. If you ignore these, your EV may be understated and your EV/EBITDA multiple misleading. Baptista Research often adjusts EV in its models to reflect these items when they are material.
Finally, context matters. An 8x EV/EBITDA multiple might be reasonable for a utility with low growth but stable cash flows. The same 8x number might look very different for a cyclical company at peak margins or a fast-growing software firm early in its lifecycle. Whenever you see an EV/EBITDA or ev/ebitda figure, you need to ask what the underlying earnings stream actually looks like.
EV/EBIT: When Earnings-Based Multiples Work Better
Definition & Economic Message
EV/EBIT uses the same enterprise value numerator but switches the denominator to EBIT:
EV/EBIT = Enterprise Value ÷ Earnings Before Interest & Taxes
EBIT includes depreciation and amortization. That may sound like a small tweak compared to EBITDA, but it changes the economic message. By keeping depreciation in the denominator, EV/EBIT acknowledges that assets age and must eventually be replaced. In sectors where capital intensity is high and depreciation is meaningful, EV/EBIT often gives a more realistic picture than EV/EBITDA.
Where EV/EBIT Shines
Where does EV/EBIT shine? Think about industrial manufacturers, airlines, shipping companies, and some traditional energy businesses. These companies rely on physical assets that cost real money to maintain and replace. An EV/EBIT multiple implicitly bakes in that wear and tear. Many value investors prefer EV/EBIT in these cases because it sits closer to the idea of operating profit after accounting for asset use.
Another advantage of EV/EBIT over price to earnings is that it still works at the enterprise level. Two companies with the same EV/EBIT multiple might have very different mixes of debt and equity, but the multiple itself is not distorted by capital structure. That allows you to compare a levered business with a conservative one and still get a clean read on operating performance.
Practical Nuances
EV/EBIT also matters when amortization is modest or closely tied to actual economic reality. If a company carries large amounts of acquired intangibles on its balance sheet, the amortization expense can depress EBIT in a way that does not match the real economics. In those cases, some analysts adjust EBIT, or they look at EV/EBITDA alongside EV/EBIT to get a range. Baptista Research often uses both metrics together, especially when a company has done multiple acquisitions.
Of course, EV/EBIT is not perfect. EBIT is still an accounting construct. It can be affected by revenue recognition, cost capitalization, and one-off items. You need to normalize earnings, adjust for unusual charges or gains, and understand the business cycle. An EV/EBIT screen that uses raw reported numbers can mislead you if a company is in the middle of a restructuring or a downturn.
When you see analysts arguing about whether EV/EBIT or EV/EBITDA is “better,” remember that each multiple captures a different trade-off. EV/EBITDA is a cleaner cash flow proxy but ignores capital intensity. EV/EBIT takes depreciation seriously but is more vulnerable to accounting noise. Your choice depends on the sector, the company’s business model, and what question you want the multiple to answer.
Price To Book & Tangible Book Value For Financials & Industrials
Price To Book Basics
Price to book is one of the oldest market ratios in equity analysis. It is simple:
Price To Book = Market Value Of Equity ÷ Book Value Of Equity
You can compute it as share price divided by book value per share, or as equity market capitalization divided by total common equity on the balance sheet. Either way, price to book compares what the market is willing to pay for a company’s equity with the accounting value of that equity.
Role In Financials
For banks, insurers, and some other financial institutions, price to book remains central. Their balance sheets are, in theory, closer to economic value because assets and liabilities are mostly financial instruments. In those sectors, investors often look at the relationship between price to book and return on equity. A bank that earns high and stable ROE usually trades at a higher price to book multiple than a bank with weak profitability. The ratio becomes a shorthand for how the market values the institution’s ability to generate returns from its equity base.
Use In Industrials & Asset-Heavy Sectors
In industrials and other asset-heavy sectors, price to book can also help, especially when you think about downside protection and replacement cost. A manufacturer trading far below book value may be priced for distressed earnings or asset write-downs. However, book value itself can be distorted by historical cost accounting, inflation, and past acquisitions. That is where the concept of tangible book value enters the picture.
Tangible Book Value & Its Interpretation
Tangible book value removes intangible assets and goodwill from equity. In formula terms, it is usually:
Tangible Book Value = Total Equity − Goodwill − Other Intangible Assets
This gives you a view of the “hard” asset base: cash, receivables, inventory, property, plant, equipment, and other tangible items. When investors talk about tangible book value, they often look at price to tangible book as well. That ratio asks how much the market is paying for the hard assets after stripping out the accounting value of brands, patents, and goodwill from past deals.
For financials and industrials that have grown through acquisitions, tangible book value can be very revealing. Large goodwill balances inflate book value, which can depress the apparent price to book ratio. By focusing on price to tangible book value instead, you get a cleaner sense of what investors are paying for the underlying tangible equity. Baptista Research often highlights this when banks or industrial firms show big gaps between book value and tangible book value.
Where Tangible Metrics Fall Short
However, there is a nuance here. Intangible assets are not always “fake.” A technology firm’s software, a consumer company’s brands, or a healthcare company’s patents can be extremely valuable. Traditional tangible book value metrics may understate the real economic value in such cases. That is why price to book and price to tangible book value are most powerful in sectors where tangible assets and regulated capital drive earnings, such as banks, insurers, and certain industrials.
In short, price to book and tangible book value are essential tools, but they are not universal. Use them where balance sheets are meaningful drivers of returns. Combine them with metrics like ROE, loan quality, or asset utilization, and you will get a much richer picture than the simple ratio alone.
How To Compare Multiples Across Companies & Sectors
Now comes the part that trips many investors: comparing multiples across companies and sectors. It is tempting to say that a stock at 10x EV/EBITDA is “cheaper” than one at 15x. But without context, that comparison is incomplete. Baptista Research usually follows a simple framework to make these comparisons more disciplined and repeatable.
1. Pick The Right Multiple For The Sector
First, you pick the right multiple for the sector and business model. For capital-intensive industrial companies, EV/EBIT and EV/EBITDA both matter. For software, EV/EBITDA and revenue multiples may carry more weight. For banks, price to book and price to tangible book value often sit at the center. You want a market ratio that aligns with how the sector actually creates value.
2. Define A Clean Peer Group
Second, you define a clean peer group. You compare companies with similar business mixes, geographies, and risk profiles. A global industrial conglomerate and a niche regional manufacturer may both be “industrials,” but their risk and growth profiles differ. When you look at an ev/ebit or ev/ebitda spread within that group, you want to know that the peers face broadly similar economic forces.
3. Make The Numbers Comparable
Third, you make sure the numbers are comparable. That means using the same time frame (trailing twelve months versus forward estimates), adjusting for major one-off items, and aligning definitions. If one company reports EBITDA after significant adjustments and another reports a more conservative figure, the raw EV/EBITDA ratio will not tell you much. The same logic applies to price to book if one bank has recently raised equity or taken large write-downs while a peer has not.
4. Interpret Spreads Through Fundamentals
Fourth, you interpret the spread in light of growth, profitability, and risk. A company that trades at a higher EV/EBIT or EV/EBITDA multiple may have stronger organic growth, higher margins, better returns on capital, or a cleaner balance sheet. Another firm might look cheap on price to book because its ROE is structurally weak. Your job is to test whether the multiple differences line up with fundamental differences. If they do not, you may have found a mispricing.
5. Respect Sector Differences
Fifth, you respect sector differences. A 20x EV/EBITDA multiple may be normal for a fast-growing cloud software company but extreme for a mature industrial. Likewise, a bank at 1.5x price to book may be fairly valued in a high-ROE market and expensive in a low-return environment. You rarely want to compare raw multiples across sectors without adjusting for growth, returns, and regulation.
6. Remember Multiples Are Snapshots
Finally, you remember that valuation multiples and market ratios are snapshots. They capture expectations at a point in time. As earnings, balance sheets, and macro conditions evolve, EV/EBITDA, EV/EBIT, price to book, and price to tangible book value all move. Analysts at Baptista Research often track these ratios across cycles to see how the market’s view has changed and whether a stock is trading rich or cheap versus its own history as well as versus peers.
When you bring all of this together, a pattern emerges. Multiples are not about single numbers. They are about relationships: between price and earnings, between enterprise value and operating profit, between market capitalization and book or tangible book value. Comparing those relationships thoughtfully across companies and sectors is what turns raw ratios into actual investment insight.
Bringing It All Together
Valuation multiples and market ratios sit at the center of real-world equity research because they compress a lot of information into simple, comparable figures. EV/EBITDA helps you look through capital structure and depreciation to get a quick sense of operating cash flow. EV/EBIT pulls depreciation back into the picture and can be more useful for asset-heavy businesses where capital intensity matters. Price to book connects market value to accounting equity, while tangible book value and price to tangible book help you focus on the hard asset base in balance-sheet-driven sectors.
Used on their own, these ratios can mislead you. A low EV/EBITDA multiple can hide weak cash conversion or heavy capex. A high EV/EBIT multiple may reflect strong growth or simply optimistic expectations. A low price to book can signal distress, weak ROE, or an opportunity, depending on the context. Tangible book value can offer comfort in some cases and understate real economic value in others.
The key is to treat valuation multiples as tools in a toolkit, not final answers. You choose the right multiple for the sector, build clean peer sets, adjust the inputs, and always interpret the numbers through the lens of growth, returns, and risk. That is how practitioners, including the team at Baptista Research, use EV/EBITDA, EV/EBIT, price to book, and tangible book value when they analyze companies day after day.
If you keep those habits, you will find that valuation multiples and market ratios stop feeling like jargon and start feeling like a structured way to read the market’s expectations. They will not tell you what to buy or sell on their own. But they will help you ask better questions, frame your investment thesis more clearly, and understand what the current price already assumes about the future.
