Intrinsic value is all about measuring what a company is genuinely worth, not what the market is feeling today. When a business’s real financial strength is compared with its current market price, investors can easily spot whether the stock is undervalued, overvalued, or fairly priced.
Read further to learn ‘how to find the Intrinsic Value of a Stock’ using practical methods like DCF, Graham’s formula, DDM, PE-based valuation, and book value. to analyse stocks with confidence and make decisions backed by actual fundamentals instead of hype.
What is Intrinsic Value in the Stock Market?
The intrinsic value of a stock is its perceived value, which is calculated through the fundamental analysis of a company, independent of its fluctuating market price.
It’s mainly used to spot stocks priced below their intrinsic value as well as those trading above it, which helps investors to make long-term decisions.
Why Intrinsic Value Matters to Investors
- Identifying undervalued assets: The value investors focus on buying assets for less than their intrinsic value, which provides a margin of safety and limits risk.
- Making rational decisions: The intrinsic value encourages decisions based on data and fundamentals, such as future earnings potential, cash flow, and the business model of a company, rather than market sentiment or emotion.
- Understanding long-term potential: It helps to determine if a company’s future growth justifies its current price, which makes it a valuable aspect for growth and long-term investors.
- Providing risk management: The investors can measure risk accurately and choose investments that align with their tolerance for risk by understanding a company’s true worth.
Market Price vs Intrinsic Value
| Aspects | Market Price | Intrinsic Value |
| Definition | It’s the price at which an asset is currently being traded in the open market | It represents the asset’s underlying or genuine worth |
| Calculation | It reflects the immediate push and pull of supply and demand in the market | It is based on fundamental analysis |
| Factors Considered | It considers market sentiment, economic conditions, company news, and interest rates | It considers financial statements, business plans, market analysis, and assets |
| Volatility | It is highly volatile and can change throughout the trading day | It is more stable, since it’s based on long-term fundamentals |
| Usage | It shows the price investors are prepared to pay at that specific moment. | It helps investors spot whether a stock is priced too low or too high |
Methods to Calculate Intrinsic Value of a Stock
Check out the methods and formulas for calculating the intrinsic value of a stock!
Discounted Cash Flow (DCF) Method
The Discounted Cash Flow (DCF) method works out a company’s value by forecasting its future free cash flows and discounting them to today’s value. It focuses on real earning ability rather than short-term market mood.
Its formula is,
Intrinsic Value = [CF1/(1+r)^1 + CF2/(1+r)^2 + … + CFn/(1+r)^n]
Here,
- CF = Future cash flow
- r = rate of discount
- n = Number of years in the period
Benjamin Graham Intrinsic Value Formula
The Benjamin Graham method is a disciplined way to judge a stock’s value by blending earnings, growth, and a margin of safety. It works best for steady companies with predictable fundamentals and moderate growth expectations.
Its formula is,
Intrinsic Value (V) = [EPS × (8.5 + 2g) × 4.4] / Y
Where,
- EPS = Earnings per share
- 8.5 = Price-to-Earnings (P/E) Ratio for a company with no growth.
- g = Expected annual growth rate
- 4.4 = Historical high-grade corporate bond yield
- Y = Current yield on AAA-rated corporate bonds.
Dividend Discount Model (DDM)
The Dividend Discount Model (DDM) estimates a stock’s worth by calculating the present value of its expected future dividends, making it most suitable for companies with steady, reliable payouts. It assumes the dividends grow at a steady long-term rate and reflect the company’s underlying strength.
The formula is,
P = D1 / (r–g)
Where,
- P = Current intrinsic value
- D1 = Expected dividend
- r = Rate of return
- g = Dividend growth rate
PE-Based Valuation Method
The PE-Based Valuation method compares a stock’s price to its earnings, helping investors to judge whether it trades above or below the typical levels. A P/E that sits below the industry average or the company’s own historical levels can hint that the stock is undervalued.
Its formula is,
P/E = Current Market Price/EPS
Book Value / Net Asset Valuation
The Book value or Net Asset value measures a company’s intrinsic worth through its assets minus liabilities. It’s useful for asset-heavy businesses where tangible resources drive value. A price near or below book value often hints at undervaluation.
Its formula is,
Intrinsic Value = Total Assets – Total Liabilities (or Shareholders’ Equity)
Step-by-Step Example to Calculate Intrinsic Value
Let’s see how to find the Intrinsic Value using the Book value method.
Let’s assume YXD Ltd. has:
Total Assets = ₹500 Cr
Total Liabilities = ₹200 Cr
Total Outstanding Shares = 10 Cr
Then, here the Book value = ₹500 Cr – ₹200 Cr = ₹300 Cr
So, Book Value per share (BVPS) = ₹300 Cr/ 10 Cr shares = ₹30 per share
In this case, if the stock is trading below ₹30 per share, it may be viewed as undervalued, and if it’s above that level, it may be seen as overvalued.
Best Tools to Check Intrinsic Value of Stocks
Stoxo is one of the convenient platforms for checking a stock’s intrinsic value. It is a stock market AI that lets the investors ask simple, natural questions and instantly get clear, data-supported insights that are reviewed by SEBI-registered analysts. It blends fundamentals with market signals, making the valuation process easier and more accurate for everyday investors.
Factors to Analyse Along With Intrinsic Value
- Management & Business Model: The intrinsic value models rely on fundamental analysis of data, but the quality of a company’s management and the strength of its business model are equally important factors.
- Risk Profile and Discount Rate: The intrinsic value of a stock is influenced by the discount rate used in valuation models, which reflects the risk of the investment.
- Economic and Industry Conditions: The economy and the direction of the industry influence a company’s future potential and, in turn, its intrinsic value.
- Margin of Safety and Relative Valuation: The value investors might use the intrinsic value to establish a margin of safety, to protect against risks or errors in calculation.
Common Mistakes While Calculating Intrinsic Value
- Overestimating Growth: If the investors push unrealistic growth numbers, it can distort the final value. So, they should keep the estimates grounded in actual performance and sensible industry trends.
- Ignoring Risk: The investors might skip risk factors that could lead to inflated valuations. They should rather use a fair discount rate and keep a margin of safety to balance uncertainty.
- Wrong Discount Rate: The investors might pick a random discount rate that throws off the entire calculation. Therefore, they should stick to WACC or a reasonable return benchmark for cleaner results.
- Relying on One Method: The investors might use only one valuation model that gives a smaller picture. So, they should cross-check values with multiple methods to avoid misleading conclusions.
Bottom line
The intrinsic value of a stock helps investors to analyse it based on its real financial strength rather than market swings. The investors can identify fair prices, manage risk better, and make decisions rooted in fundamentals instead of noise by using methods like DCF, Graham’s formula, DDM, P/E valuation, and book value.
FAQ‘s
The intrinsic value of a stock is calculated by analysing the company’s earnings, assets, cash flow, or dividends using methods such as DCF, Graham’s formula, P/E valuation, or book value to estimate a stock’s true worth.
The DCF is considered dependable because it focuses on future cash flow. Still, the accuracy improves when multiple methods are combined and checked against each other.
Yes, the retail traders can calculate the intrinsic value manually, with basic financial data such as earnings, cash flow, assets, and growth rates, and using simple formulas.
If a stock is undervalued, its intrinsic value is higher than its current market price. This gap signals that the stock may be trading below its true value.
The investors might prefer a margin of safety of around, say, 20–30%, depending on the company’s stability, growth prospects, and overall risk.
The intrinsic value stays more stable in sharp market drops because it is based on long-term fundamentals. The market prices may fall quickly, but intrinsic value changes slowly depending on the company’s quantitative as well as qualitative factors.
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