Ask two analysts what a business is worth, and you might get two very different answers. One may build a discounted cash flow model, calculate future free cash flows, apply a cost of capital, and land on a precise value. The other may pull up a comps table, look at how peers are priced in the market, and derive a value based on current multiples.
Neither is wrong. They’re just using two different philosophies of valuation: intrinsic and relative.
Understanding the difference isn’t just an academic exercise. It shapes how you value companies in practice, how you communicate value to clients or investors, and how you interpret what the market is really saying about a business.
In this article, we’ll unpack what each approach means, how they’re built, when to use each one, and how the best practitioners use both to form a more complete view of value.
What Is Intrinsic Valuation?
Intrinsic valuation asks one basic question:
What is this business worth based on its ability to generate future cash flows?
This approach focuses on the fundamentals of the company—its revenues, margins, investments, and risks—and calculates value based on how much cash it can produce over time. The most common method is the Discounted Cash Flow (DCF) model.
The idea is simple: a business is worth the present value of all the cash it can generate in the future, adjusted for the risk of those cash flows. The result doesn’t depend on how similar companies are priced—it depends on how this company is expected to perform.
Strengths:
- Deeply tied to the company’s actual performance
- Independent of market mood or temporary mispricing
- Useful for long-term investors and private companies
Limitations:
- Highly sensitive to assumptions (growth, margins, WACC)
- Easy to manipulate or bias with optimistic forecasts
- Less useful when reliable forecasts aren’t available
Intrinsic valuation is like trying to value a house based on how much rental income it can generate—not what the neighbor’s house sold for.
What Is Relative Valuation?
Relative valuation starts with a different question:
What are similar businesses worth in the market right now, and how does this one compare?
This approach relies on market-based benchmarks—most commonly through valuation multiples like EV/EBITDA, P/E, or EV/Revenue. Instead of trying to forecast long-term cash flows, you look at how comparable companies are priced and apply those multiples to the target’s financials.
If similar companies are trading at 12× EBITDA, and your company has $50 million in EBITDA, you might value it at around $600 million—assuming the market sees them as equally attractive.
Strengths:
- Fast to apply and easy to communicate
- Reflects current market sentiment and trading dynamics
- Grounded in real pricing data, useful for IPOs and deal-making
Limitations:
- Only as good as the comps selected
- Ignores company-specific future performance potential
- Distorted during market extremes (bubbles, crashes, illiquidity)
Relative valuation is like pricing a house by looking at what similar homes in the neighborhood sold for—regardless of your specific renovation plans or rental income forecasts.
How to Choose Between Intrinsic and Relative Valuation
The best valuation practitioners don’t rely on one method blindly—they choose the right tool for the job, based on the context, the company, and the market.
Use intrinsic valuation (like DCF) when:
- You have access to reliable financial forecasts
- The company’s value is driven by long-term fundamentals, not short-term market noise
- You’re working on private companies or businesses with few true peers
- The business model is stable and predictable, making cash flow estimation realistic
Use relative valuation (like Comps or Precedents) when:
- You need to benchmark quickly against how the market is pricing similar companies
- The company is preparing for an IPO, where market perception drives pricing
- The business operates in a sector where peer sets are well-established and liquid
- You’re working on a fairness opinion or transaction that must reflect current market norms
In real-world banking and investing, both methods are used side by side. Intrinsic valuation helps you understand where the business should be priced based on fundamentals. Relative valuation shows where the market is pricing it today.
Used together, they allow you to triangulate a credible valuation range—balancing logic and reality, theory and practice.
Closing Thoughts
Intrinsic and relative valuation aren’t competing methods—they’re complementary perspectives. One looks inward, asking what a business can generate. The other looks outward, asking how the market values similar stories. The most effective professionals understand both, apply them thoughtfully, and use them together to shape a more complete view of value.
In volatile markets, relative valuation can swing with investor sentiment. In uncertain businesses, intrinsic valuation can be built on shaky assumptions. That’s why experienced bankers and analysts know that context matters more than the formula—and that good valuation work is as much about judgment as it is about modeling.
Together, these two approaches form the foundation of how investment banks, equity analysts, private equity firms, and CFOs assess worth. The key is not to choose one—it’s to understand when and how to use both.