How to Calculate Intrinsic Value

A comprehensive guide to determining what a stock is really worth

What is Intrinsic Value?

Intrinsic value is the estimated true worth of an asset based on its fundamental characteristics, independent of its current market price. For stocks, it represents what a company is actually worth based on its ability to generate future cash flows.

When the market price is below the intrinsic value, the stock may be undervalued and represent a buying opportunity. When the price exceeds intrinsic value, it may be overvalued.

Key Concept: Margin of Safety = (Intrinsic Value - Market Price) / Intrinsic Value

Methods to Calculate Intrinsic Value

1. Discounted Cash Flow (DCF)

The gold standard for intrinsic value calculation. DCF values a company based on the present value of its expected future free cash flows.

Intrinsic Value = Sum of (FCF / (1 + r)^n) + Terminal Value / (1 + r)^n

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2. Dividend Discount Model (DDM)

Best for dividend-paying stocks. Values a stock based on the present value of all future dividend payments.

Intrinsic Value = D1 / (r - g)

Where D1 = next year's dividend, r = required return, g = dividend growth rate

3. Comparable Company Analysis

Values a company by comparing it to similar publicly traded companies using valuation multiples like P/E, EV/EBITDA, or P/S ratios.

Intrinsic Value = EPS × Industry Average P/E

4. Asset-Based Valuation

Calculates intrinsic value based on the net value of a company's assets minus liabilities. Best for asset-heavy companies or liquidation scenarios.

Intrinsic Value = Total Assets - Total Liabilities

Step-by-Step: DCF Calculation

Project Future Free Cash Flows

Estimate the company's free cash flows for the next 5-10 years. Use historical growth rates, analyst estimates, and industry trends as guides.

FCF = Operating Cash Flow - Capital Expenditures

Calculate Terminal Value

Estimate the value of all cash flows beyond your projection period using the perpetuity growth method.

Terminal Value = FCF(n) × (1 + g) / (WACC - g)

Determine Discount Rate (WACC)

Calculate the Weighted Average Cost of Capital to use as your discount rate. This reflects the company's cost of financing.

WACC = (E/V × Re) + (D/V × Rd × (1 - Tax Rate))

Calculate Present Value

Discount each year's projected cash flow and the terminal value back to today using the WACC.

PV = FCF / (1 + WACC)^n

Calculate Intrinsic Value Per Share

Sum all present values and divide by the number of shares outstanding to get the intrinsic value per share.

Intrinsic Value Per Share = Total PV / Shares Outstanding

Example Calculation

Given:

Current Free Cash Flow: $100 million
Expected growth rate: 10% for 5 years, then 3% perpetual
WACC: 8%
Shares Outstanding: 50 million

Year 1-5 FCF Projections:

Y1: $110M, Y2: $121M, Y3: $133M, Y4: $146M, Y5: $161M

Terminal Value: $161M × 1.03 / (0.08 - 0.03) = $3,319M

Total PV of Cash Flows + Terminal Value: ~$2,800M

Intrinsic Value Per Share: $2,800M / 50M = $56.00

Calculate Intrinsic Value Now

Use our free DCF calculator to find the intrinsic value of any stock.

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Frequently Asked Questions

What is intrinsic value?

Intrinsic value is the estimated true worth of an asset based on its fundamental characteristics, independent of its current market price. For stocks, it represents what a company is actually worth based on its ability to generate future cash flows.

How do you calculate intrinsic value using DCF?

To calculate intrinsic value using DCF: 1) Project future free cash flows for 5-10 years, 2) Calculate terminal value, 3) Discount all cash flows back to present value using WACC, 4) Sum the present values and divide by shares outstanding to get per-share intrinsic value.

What is a good margin of safety?

A margin of safety of 20-30% is typically considered adequate for stable companies, while 40-50% may be appropriate for riskier investments. Benjamin Graham, the father of value investing, recommended buying only when the price is significantly below intrinsic value.

Is intrinsic value the same as book value?

No. Book value is an accounting measure based on historical costs from the balance sheet. Intrinsic value is forward-looking and based on the present value of expected future cash flows. A company can have high intrinsic value but low book value if it has strong future earnings potential.

Which method is best for calculating intrinsic value?

DCF analysis is considered the gold standard for intrinsic value calculation as it focuses on cash flows. However, the best method depends on the company type: use DCF for stable businesses, dividend discount model for dividend payers, and comparable valuation for growth companies with unpredictable cash flows.