Stock Intrinsic Value: Definition, Example & Calculation
Have you ever wondered whether a stock is truly worth its price on the market? The figure on your trading screen is not necessarily the true intrinsic value of the stock, and it is just the current agreed price between buyers and sellers. The stock intrinsic value gives you the real picture of the value of the company in relation to its core but not what the market thinks or feels.
Imagine it is a car purchase – you would not pay the sticker price without inspecting their engine, miles, and state, right? On the same note, intrinsic value is employed by the investors to peep under the hood of a company prior to investing.
Here, you will know about intrinsic value of a stock, intrinsic value of a stock calculation, importance of intrinsic value of a stock and how to use an intrinsic value calculator to become a smart investor.
What Does Intrinsic Value of Stock Mean?
Intrinsic value of a stock is the actual underlined worth of the stock in terms of financial performance of the company, its assets and future earnings potential.
Contrary to the market price which is determined by the mood of investors and demand on a daily basis, intrinsic value is the actual capacity of the company to make profits.
Note: Intrinsic Value = Real Worth of a Company (data based). Market Value = What Investors are ready to give at the moment.
Why Intrinsic Value Matters in Investing?
It is very important to know the intrinsic value of the stock in order to make wise investment choices. It is the real value of a business in terms of its basics including profits, resources, growth opportunities, as well as cash flow-instead of passing market moods or price fluctuations.
A comparison of the market value of a stock with the intrinsic value of the stock will give you a better picture of whether or not the stock is:
- Undervalued (Market Price < Intrinsic Value): The stock is trading at a lower value than it should be therefore indicating the possibility of a purchase.
- Overpriced (Market Price exceeds Intrinsic Value): The stock is over priced meaning that it is valued higher than its real value, which is an indication of a potential sell or avoid.
This will enable the investors to concentrate on long-term value as opposed to short time speculation. Through intrinsic value analysis, investors will be able to make data-driven, more rational decisions that will have less influence on market hype and volatility.
It is the basis of value investing, an approach that has been championed by one of the most renowned investors Warren Buffett and Benjamin Graham who have stressed the need to purchase good companies at a good price and hang onto them till the market appreciates their worth.
Market Value vs Intrinsic Value
Aspect | Market Value | Intrinsic Value |
Definition | Current trading price on stock market | True worth based on fundamentals |
Influenced by | Demand, sentiment, speculation | Earnings, cash flow, growth rate |
Volatility | Highly volatile | More stable |
Objective | Often subjective | Based on analysis |
Factors That Influence a Stock’s Intrinsic Value
- Earnings and Cash Flow: The quality of profitability is high.
- Growth Future: Future expansion, innovation and market share.
- Debt Levels: Debt causes a decline in intrinsic value.
- Interest Rates: Have an impact on discount rates and present value of cash flows in future.
- Economic Conditions: Inflation, competition, government policies are also such factors that affect value.
How to Find the Intrinsic Value of a Stock
- The company’s financials should be examined in terms of revenue, profits, cash flow and debt.
- Use growth assumptions to estimate future cash flows or earnings.
- Discount those future values back to the present using a reasonable discount rate.
If this sounds complex – don’t worry. You can also use an intrinsic value calculator to simplify the process.
How to Calculate Intrinsic Value of a Stock?
There isn’t one universal formula. Investors use various models depending on the company type:
- Discounted Cash Flow (DCF) Method – It is forecasted on the basis of the anticipated free cash flows.
- Dividend Discount Model (DDM)- Suits best when the company pays dividends.
- Earnings Multiplier or P/E Method- According to potential earnings.
- Asset-Based Valuation- This is the valuation that is based on the tangible assets of a company.
Discounted Cash Flow (DCF) Model
The DCF model is the most popular method to determine intrinsic value.
Steps in the DCF Method:
- For the next 5-10 years, estimate the free cash flow (FCF).
- Choose a discount rate (usually the company’s weighted average cost of capital).
- Calculate the present value of future cash flows.
- Add the terminal value to capture long-term growth.
- Sum up all these values – that’s your intrinsic value.
DCF Formula:
Intrinsic Value=∑FCFt(1+r)t+TV(1+r)nIntrinsic\ Value = \sum \frac{FCF_t}{(1+r)^t} + \frac{TV}{(1+r)^n}Intrinsic Value=∑(1+r)tFCFt+(1+r)nTV
Where:
- FCF = Free Cash Flow
- r = Discount Rate
- TV = Terminal Value
- n = Number of Years
Dividend Discount Model (DDM)
If a company pays regular dividends, the DDM can be used.
Formula:
Intrinsic Value=Dr−gIntrinsic\ Value = \frac{D}{r – g}Intrinsic Value=r−gD
Where:
- D = Expected Annual Dividend
- r = Required Rate of Return
- g = Dividend Growth Rate
Example: If a company pays ₹10 dividend, grows 5% annually, and you require a 10% return:
Intrinsic Value=100.10−0.05=₹200Intrinsic\ Value = \frac{10}{0.10 – 0.05} = ₹200Intrinsic Value=0.10−0.0510=₹200
If the market price is ₹150, it’s undervalued.
Steps to Use Intrinsic Value Calculator
This calculator simplifies valuation by automating formulas.
- Input company data – earnings, growth rate, and discount rate.
- The calculator estimates future cash flows.
- It automatically discounts them to present value.
- The result shows the stock’s estimated intrinsic value.
Popular calculators include those on platforms like MoneyControl, Ticker, and Investopedia.
Example of Intrinsic Value Calculation
Details | Value |
Free Cash Flow (Current) | ₹10,00,000 |
Growth Rate | 10% |
Discount Rate | 8% |
Period | 5 years |
Step 1: Project Cash Flows for 5 Years
Year 1: ₹11,00,000
Year 2: ₹12,10,000
Year 3: ₹13,31,000
Year 4: ₹14,64,100
Year 5: ₹16,10,510
Step 2: Discount Cash Flows to Present Value
PV=FCF(1+r)tPV = \frac{FCF}{(1+r)^t}PV=(1+r)tFCF
Step 3: Add Terminal Value and Sum All Present Values
You’ll get an approximate intrinsic value. If it’s ₹55 lakh and market cap is ₹45 lakh – Undervalued.
How to Interpret Stock Intrinsic Value Results
Here’s how to make sense of your result:
- Intrinsic Value > Market Price: Buy (stock is undervalued).
- Intrinsic Value < Market Price: Sell (stock is overvalued).
- Intrinsic Value ≈ Market Price: Hold (fairly priced).
This logic forms the foundation of value investing strategies.
Common Mistakes When Calculating Intrinsic Value
- Using unrealistic growth rates.
- Ignoring economic cycles or inflation.
- Choosing an incorrect discount rate.
- Forgetting terminal value.
- Relying on short-term trends instead of fundamentals.
Advantages of Knowing a Stock’s Intrinsic Value
- Make investment decisions that are based on data.
- Do not engage in emotional purchases or sales.
- Find long term opportunities.
- Reduce investment risk.
- Grow Rich by Disciplined Investing.
Conclusion
The Stock Intrinsic Value is your compass in the unpredictable world of investing. It cuts through the noise of daily market fluctuations and tells you what a company is truly worth.
By learning how to find intrinsic value of stock, you gain the power to make smarter, more confident investment choices – whether using the DCF model, DDM, or an intrinsic value calculator.
Remember, markets are driven by emotion in the short term, but intrinsic value always wins in the long run.
FAQ'S
What is stock intrinsic value?
It’s the stock’s real worth based on fundamentals like earnings, cash flow, and growth – not the market price.
How can I calculate the intrinsic value of stock?
You can use models like DCF or DDM, or an online intrinsic value calculator for quick estimates.
What tools can I use to find intrinsic value?
Tools like Ticker, MoneyControl, or Finology provide built-in intrinsic value calculators.
How reliable is the DCF model?
It’s accurate when you use realistic assumptions for cash flow, growth rate, and discount rate.
Should beginners calculate intrinsic value manually?
You can, but using an intrinsic value calculator simplifies the process.
What happens if market price equals intrinsic value?
That means the stock is fairly valued – neither a buy nor a sell opportunity.
