How do you calculate the intrinsic value of a stock?
Intrinsic value is what a business is genuinely worth, judged by the cash it can hand its owners over its life. Calculating it is less about a magic formula and more about a disciplined estimate. Here are the main ways to do it.
- Discounted cash flow. Project the free cash flow the business can produce, then discount those future cash flows back to today, because money later is worth less than money now. Add them up and you have an intrinsic value.
- Earnings multiple. For steadier, comparable companies, apply a sensible multiple to normalised earnings (earnings stripped of one-offs). A durable business that reliably earns a certain profit is worth a reasonable multiple of it.
- Asset based. For banks, property, and holding companies, value what the company owns net of what it owes. Sometimes the balance sheet, not the earnings, tells the truer story.
- Dividend based. For reliable income payers, value the stream of dividends the company can sustainably pay over time.
Pick the method that fits the business
No single method fits everything. A predictable software company suits a discounted cash flow or an earnings multiple. A bank suits an asset and earnings blend. A mature utility that pays a steady dividend suits a dividend approach. Using the wrong lens gives a confident but wrong number.
Normalise, then be conservative
Whatever the method, two disciplines matter most. First, normalise: strip out one-off gains and losses so you value what the business earns in a typical year, not a peak or a trough. Second, be conservative: modest growth assumptions and a healthy discount rate protect you from your own optimism. A cautious estimate you trust beats a precise one you had to force.
Treat the answer as a range
Intrinsic value is an estimate, so express it as a range, not a single figure. Two reasonable investors will land in different places. The aim is to know roughly what a business is worth, then buy only with a margin of safety below it.
The bottom line
To calculate a stock's intrinsic value, estimate the cash the business can earn for its owners using the method that fits it, normalise the numbers, stay conservative, and treat the result as a range. Then compare that range to the price.
AlphaTeak provides analysis and education, not personalized financial advice. Always do your own research before investing.
AlphaTeak scores any stock across eight pillars, estimates fair value, and keeps an honest, public track record. Analysis and education, not advice.
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