Intrinsic Value Calculator

What Is Intrinsic Value?

Intrinsic value is the estimated actual worth of a company's stock based on factors such as its earnings, financial strength, future growth potential, and business risks. It helps investors understand what a stock might be worth based on the company's financial performance rather than just its current market price.

The market price is the price at which a stock is currently trading in the stock market. In contrast, the intrinsic value of a stock is an estimate calculated using financial information and valuation methods. A fair value estimate is another way to determine what a stock might reasonably be worth based on certain assumptions.

Comparing these values can help investors identify stocks that may be undervalued or overvalued. However, intrinsic value is only an estimate, and different valuation methods or assumptions can produce different results.

Simple Example

Suppose a company's stock has an estimated intrinsic value of $150, but its current market price is $120. This means the stock is trading $30 below its estimated value, or 20% below the estimated intrinsic value.

In this situation, an investor might consider the stock potentially undervalued. However, it does not guarantee that the stock price will increase. The company's performance, market conditions, and the accuracy of the valuation assumptions can all affect the outcome.

Benjamin Graham Intrinsic Value Formula

The Benjamin Graham intrinsic value formula is a traditional stock valuation method used to estimate what a company's shares might be worth based on its earnings and expected growth. Benjamin Graham, widely known as the father of value investing, emphasized the importance of understanding a stock's underlying value before investing.

The formula considers a company's earnings per share (EPS), expected annual earnings growth, and the yield on high-grade corporate bonds to estimate the intrinsic value per share.

V = EPS x (8.5 + 2g ) x 4.4 ÷ Y

Where:

• V = Estimated intrinsic value per share in dollars ($).
• EPS = Earnings per share, expressed in dollars ($).
• g = Estimated annual earnings growth rate, expressed as a percentage number (for example, 5 for 5%).
• Y = Current yield on high-grade corporate bonds, expressed as a percentage number (for example, 4.4 for 4.4%).
• 8.5 = Assumed base price-to-earnings (P/E) ratio for a company with no expected growth.
• 4.4 = Historical reference interest rate used in the original version of the formula.

Example of How the Formula Works

Suppose a company has earnings per share of $5, an expected annual earnings growth rate of 6%, and a high-grade corporate bond yield of 4.4%.

Using the formula:

V = 5 x (8.5 + 2 x 6) x 4.4 ÷ 4.4

V = 5 x 20.5 = $102.50

The estimated intrinsic value is $102.50 per share. If the stock is trading at $80, it may appear undervalued based on this estimate. However, this does not guarantee that the stock will reach its estimated value or generate a profit.

Important Limitations

The Graham formula is a historical valuation model, not a universally accurate method for valuing every stock. Its results depend on the accuracy of earnings and growth estimates, as well as the bond yield used in the calculation. Actual company performance, market conditions, debt, and business risks can all affect a stock's value.

A Graham formula calculator can help estimate intrinsic value quickly, but investors should use the result as a starting point for further research rather than as the sole basis for an investment decision.

How to Use the Intrinsic Value Calculator

The Intrinsic Value Calculator (Graham-style) helps you estimate the fair value of a stock using its earnings, expected growth rate, and AAA corporate bond yield. Follow these simple steps to calculate the estimated intrinsic value per share.

1. Enter Earnings Per Share (EPS): Enter the company's trailing 12-month earnings per share in dollars ($). This represents the company's earnings for each outstanding share over the past 12 months.
2. Enter the Expected Growth Rate: Enter the expected annual earnings growth rate as a percentage. This estimate reflects how much the company's earnings may grow annually over the next 7–10 years.
3. Enter the AAA Corporate Bond Yield: Enter the current yield on 20-year AAA corporate bonds as a percentage. This value is used in the Graham-style formula to estimate the stock's intrinsic value.
4. Enter the Current Stock Price: Enter the stock's current market price in dollars ($). The calculator uses this value to compare the market price with the estimated intrinsic value and calculate the potential margin of safety.
5. View the Calculation Breakdown (Optional): Enable the Show Calculation Breakdown option if you want to see the details behind the calculation and better understand how the estimated value is determined.

After entering the required information, click the Calculate button to view the estimated intrinsic value per share in dollars ($). Compare this estimate with the current stock price to assess whether the stock appears undervalued or overvalued based on the formula.

Remember that intrinsic value is an estimate, not a guaranteed stock price. Actual market prices may differ because of business performance, market conditions, and other factors.

Frequently Asked Questions (FAQs)