#intrinsicvalueofshare

Intrinsic Value of Stock or Share: Definition and How to Calculate It

Introduction to Intrinsic Value

If you are an investor or actively involved in the stock market, the term Intrinsic Value is one you’ve likely heard often. But what exactly does it mean? Simply put, every share has two values — its market value and its intrinsic value. The intrinsic value of a stock refers to the true worth of that company based on its fundamentals, performance, and future potential, rather than its current market price.

In this article, we’ll understand:

What is the intrinsic value of a stock?

Why it matters to investors

The formula and methods used to calculate intrinsic value

How to calculate it easily and accurately

What Is Intrinsic Value?

The Intrinsic Value of a stock is the actual worth that can be estimated through financial analysis rather than market speculation. It’s determined by evaluating the company’s fundamentals—like earnings, cash flow, growth prospects, and assets—and discounting them to their present value.

For example: If a stock is trading at ₹200, but its intrinsic value is ₹250, it means the stock is undervalued and could be a good investment. However, if the intrinsic value is ₹150, it means the stock is overvalued and might not be worth buying at its current price.

Why Intrinsic Value Matters

Knowing a stock’s intrinsic value helps investors make smarter and more disciplined decisions. Here’s why it’s important:

Helps identify undervalued stocks with long-term potential

Protects investors from buying overvalued shares

Encourages rational, data-based investing instead of emotional decisions

Forms the foundation of value investing, a strategy popularized by Warren Buffett

How to Calculate the Intrinsic Value of a Stock

There are several ways to calculate the intrinsic value of a stock. Here are the most common and effective methods:

1. Discounted Cash Flow (DCF) Method

The DCF Method estimates the present value of a company’s expected future cash flows.

Formula:

[ IV = \sum \frac{CF_t}{(1 + r)^t} ]

Where:

CF = Expected future cash flows

r = Discount rate (required rate of return)

t = Number of years

In simple terms, you estimate future cash flows, discount them to present value, and sum them up to find the intrinsic value.

2. Dividend Discount Model (DDM)

The DDM applies to companies that pay regular dividends. It calculates the present value of future dividends.

Formula:

[ IV = \frac{D}{r - g} ]

Where:

D = Expected annual dividend per share

r = Required rate of return

g = Dividend growth rate

Example: If a company pays ₹10 as an annual dividend, expects 5% growth, and requires a 12% return: [ IV = \frac{10}{0.12 - 0.05} = ₹142.85 ]

3. Earnings Multiplier (P/E Ratio) Method

This simple method connects Earnings Per Share (EPS) and the justified P/E ratio.

Formula: [ IV = EPS × P/E ]

Example: If a company’s EPS is ₹20 and its justified P/E ratio is 15, [ IV = 20 × 15 = ₹300 ]

4. Asset-Based Valuation

This method calculates value based on a company’s assets and liabilities.

Formula: [ IV = \frac{Total Assets - Total Liabilities}{No. of Shares} ]

It’s particularly useful for asset-heavy sectors like real estate, banking, and manufacturing.

Intrinsic Value vs Market Value

Factor

Intrinsic Value

Market Value

Meaning

Determined by fundamental analysis

Determined by demand & supply

Basis

Company’s earnings, assets, and growth

Market sentiment and trading trends

Stability

Stable over time

Fluctuates daily

Investor Use

Helps identify undervalued or overvalued stocks

Reflects current trading price

Risks in Calculating Intrinsic Value

While intrinsic value is crucial, calculating it comes with challenges:

1. Assumption Risk

Intrinsic value relies on estimates like cash flow, growth rate, and discount rate. Wrong assumptions can distort the result.

2. Market Sentiment Risk

Investor emotions and market conditions can cause a stock’s market price to deviate widely from its intrinsic value.

3. Economic & Policy Risk

External factors like inflation, interest rates, or government policies can impact a company’s fundamentals.

4. Data and Calculation Risk

Methods like DCF require accurate financial data. Small changes in inputs can lead to large variations in the final value.

5. Dynamic Business Environment

As businesses evolve, today’s valuation may not hold tomorrow. Regular review is essential.

How to Reduce These Risks

Use multiple valuation methods (DCF, DDM, P/E, Asset-Based) instead of relying on one.

Maintain a margin of safety—invest only when intrinsic value is 20–30% higher than market price.

Re-evaluate valuations periodically as new financial data emerges.

Consider qualitative factors like management quality, brand value, and competitive edge.

Key Takeaways

Intrinsic Value is an estimated true worth of a stock.

Buy when Intrinsic Value > Market Price (Undervalued).

Avoid when Intrinsic Value < Market Price (Overvalued).

Combine multiple valuation methods for better accuracy.

Always invest with a margin of safety.

Conclusion

Intrinsic Value: What It Means and Why It Matters

When investors evaluate a stock, one of the most important concepts is its intrinsic value. The intrinsic value of a company’s shares is an estimate of what the stock is “really worth,” based on fundamentals, future cash flows, and the business itself—not just what the stock is trading at today.

In simpler terms, if the stock market quotes a share at ₹200, that is its market value. But the intrinsic value might be ₹250 or ₹150, depending on calculations and assumptions. If the intrinsic value is higher than the market price, some see that as an opportunity to buy; if it’s lower, it may suggest overvaluation. More details are available on the Finowings page about how to calculate intrinsic value. 

Why Is Intrinsic Value Important?

Intrinsic value of stocks helps investors:

Identify undervalued shares: Buying shares when the intrinsic value is significantly above market price can offer the potential upside.

Avoid overpaying: If the market price is far above your computed intrinsic value, you might wait or skip the purchase.

Anchor decisions on fundamentals: Rather than being swayed by market noise, emotions, or short‑term trends, intrinsic value puts emphasis on company strength, growth, cash flow, and sustainability.

Practice value investing: Many famed investors, including Warren Buffett, rely heavily on intrinsic value reasoning in their approach.

Because intrinsic value is rooted in fundamentals, it tends to be more stable over time than market prices, which oscillate with sentiment, speculation, and news. 

How to Calculate Intrinsic Value of Stocks

There is no single perfect formula, but some common methods are:

Discounted Cash Flow (DCF) Method  You forecast the company’s future cash flows, discount them back to present value (using a required rate of return), and sum them up. This is one of the most popular and fundamental ways to estimate intrinsic value. 

Dividend Discount Model (DDM)  This works well for companies that pay consistent dividends. You project future dividends, assume a growth rate, and discount them back.

Earnings Multiplier / P/E Method  Here you take the company’s earnings per share (EPS) and multiply by a justified P/E ratio to get a rough intrinsic value. For example, if EPS is ₹20 and you pick a P/E of 15, the intrinsic value becomes ₹300.

Asset-Based Valuation  This method looks at the company’s assets minus liabilities, divided by number of shares. This is often more useful for firms with tangible assets, like real estate or manufacturing businesses.

Each of these methods has strengths and limitations. Using more than one method and comparing results tends to give a more balanced view.

Intrinsic Value vs. Market Value

Intrinsic value and market value differ in several ways:

Intrinsic value is derived from fundamentals (cash flows, growth, assets, liabilities), while market value is what buyers and sellers agree on at any moment, influenced by supply/demand and sentiment.

Market value can volatilely change day to day; intrinsic value estimates tend to change more gradually as business fundamentals evolve.

A stock may be trading above or below intrinsic value; this gap is what often creates investment opportunities (or risk).

Risks & Challenges in Using Intrinsic Value

Estimating intrinsic value is not risk‑free. Some of the risks are:

Assumption Risk  Forecasts for future cash flows, growth rates, and discount rates are guesses. Wrong assumptions can lead to wildly inaccurate intrinsic values.

Market Sentiment & Irrational Behavior  Even if intrinsic value suggests a stock is undervalued, market forces or sentiment may keep the price down (or push it higher).

Changing Business Conditions  Regulation, technology shifts, competition, or macro events can alter a company’s future and invalidate earlier intrinsic value estimates.

Data Limitations  For newer companies or those with less transparency, projecting cash flows or reliable financials may not be feasible.

Given these risks, it’s wise to use multiple valuation methods, maintain a margin of safety (i.e. buy only when market price is a significant discount to intrinsic value), and review valuations periodically as new information comes in.

Key Points to Keep in Mind

Intrinsic value is always an estimate—not a definitive “true price.”

Don’t rely on a single method. Use DCF, multipliers, asset methods together.

Be cautious with your assumptions—small changes in discount rate or growth can shift value a lot.

Always compare intrinsic value with market price before making investment decisions.

Apply a margin of safety: aim to buy only when intrinsic value is perhaps 20–30% higher than market price to account for errors.