Valuation guide · Updated October 2026
How to calculate the intrinsic value of a stock
Three methods, one fictional company and every assumption on the table: a discounted cash flow model, Benjamin Graham’s formula and an earnings-multiple cross-check, turned into a value range and a margin of safety.
The intrinsic value of a stock is an estimate of what the business is worth to its owners, based on the cash it can produce in the future. The market price is what other investors pay today; intrinsic value is your own estimate, built from assumptions you can write down and challenge. When the two diverge, you have a research question, not an answer. No formula gives one correct number, so this guide shows how to calculate the intrinsic value of a stock with three methods, applies them to one fictional company and turns the results into a range you can check line by line.
How to calculate intrinsic value in 5 steps
The reference method is a discounted cash flow (DCF) model. To find the intrinsic value of a stock with it:
- Estimate future free cash flow for the next 5 to 10 years, starting from a normal recent year.
- Choose a discount rate: the annual return you require for the risk, often 8% to 10% for a large US company.
- Add a terminal value for the years after your forecast, with a growth rate no higher than long-run economic growth.
- Discount everything to today and express it per diluted share.
- Cross-check with Graham’s formula and earnings multiples, then compare the range with the price to measure your margin of safety.
What is the intrinsic value of a stock?
Intrinsic value, sometimes called the “true value” of a stock, is the present value of all the cash a company is expected to generate for its shareholders over its remaining life. Two people with the same data can reach different values because they assume different growth, profitability and risk, so the result is always an estimate.
Intrinsic value vs market value, fair value and price target
Intrinsic value is not the only value quoted for a share:
| Term | What it is | Who sets it | What it is used for |
|---|---|---|---|
| Intrinsic value | Present value of the future cash flows to shareholders | You or an analyst, from explicit assumptions | Judging whether the price leaves a margin of safety |
| Market value (price) | The last traded price; times the share count, the market capitalization | Buyers and sellers, throughout each trading session | Knowing what you would pay today |
| Fair value | In research, usually a provider’s intrinsic value estimate; in accounting (IFRS 13, ASC 820), the price an asset would fetch in an orderly sale | A research provider, or the market for accounting purposes | Comparing your estimate with someone else’s |
| Price target | An analyst’s forecast of the share price, usually 12 months ahead | Brokerage analysts | Gauging what analysts expect, not estimating value |
| Book value | Assets minus liabilities, per share | Accounting rules | A reference point for asset-heavy firms, less useful for asset-light ones |
When people ask about the fair value of a stock, they usually mean someone’s intrinsic value estimate. Intrinsic value vs market value is the comparison that matters: the market value moves daily with sentiment, while intrinsic value should only change when the facts about the business change.
Method 1: the discounted cash flow (DCF) formula, step by step
A DCF values the future cash flows directly, which makes it the most complete method. The formula for the intrinsic value of a stock in a DCF is:
Value per share = FCF1/(1 + r)1 + FCF2/(1 + r)2 + … + FCFn/(1 + r)n + TV/(1 + r)n
TV = FCFn × (1 + g) / (r − g)
FCF is free cash flow per share, r the discount rate, n the number of forecast years, TV the terminal value and g the long-term growth rate after year n.
- Normalize free cash flow: operating cash flow minus capital expenditure, for a normal year. Deduct stock-based compensation when it is large; it is a real cost to shareholders.
- Forecast growth in two stages: faster in years 1 to 5, while plans and markets are visible, then slower in years 6 to 10 as the business matures.
- Pick a discount rate: the risk-free rate plus a premium. A 4% Treasury yield plus 5% for an average-risk stock gives 9%; smaller, cyclical or indebted companies deserve more.
- Set terminal growth between 2% and 3%, close to long-run inflation plus real growth, and well below r.
- Discount and add up. With per-share cash flow after interest, as below, the sum is the value per share. With company-level cash flow before interest, discount at the cost of capital, subtract net debt and divide by the diluted share count.
DCF example: Example Corp, a fictional US company
Example Corp is invented for this guide: free cash flow of $5.00 per share over the last 12 months, 100 million diluted shares, $500 million of net debt, EPS of $6.00, operating profit (EBIT) of $800 million and a hypothetical share price of $80. Assumptions: free cash flow grows 8% a year for five years, then 4% for five years; terminal growth 2.5%; discount rate 9%.
| Year | Growth | FCF per share | Discount factor at 9% | Present value |
|---|---|---|---|---|
| 1 | 8% | $5.40 | 0.917 | $4.95 |
| 2 | 8% | $5.83 | 0.842 | $4.91 |
| 3 | 8% | $6.30 | 0.772 | $4.86 |
| 4 | 8% | $6.80 | 0.708 | $4.82 |
| 5 | 8% | $7.35 | 0.650 | $4.77 |
| 6 | 4% | $7.64 | 0.596 | $4.56 |
| 7 | 4% | $7.95 | 0.547 | $4.35 |
| 8 | 4% | $8.26 | 0.502 | $4.15 |
| 9 | 4% | $8.59 | 0.460 | $3.96 |
| 10 | 4% | $8.94 | 0.422 | $3.78 |
| Years 1 to 10 | $45.10 | |||
| Terminal value: $8.94 × 1.025 / (0.09 − 0.025) = $140.95, discounted over 10 years | $59.54 | |||
| Intrinsic value per share, base case | $104.64 | |||
The base case is about $105 per share (rows are rounded), and 57% of it comes from the terminal value, that is, from cash flows more than ten years away. That is normal for a DCF, and it is why the sensitivity check below matters more than the decimals.
| Discount rate | Terminal growth 2.0% | Terminal growth 2.5% | Terminal growth 3.0% |
|---|---|---|---|
| 8% | $118 | $125 | $133 |
| 9% | $100 | $105 | $110 |
| 10% | $87 | $90 | $94 |
One point of discount rate moves the base case by about $15 to $20 per share; half a point of terminal growth by $3 to $8. A DCF shows which assumptions drive the value, not a precise price. Rerun the example with your own inputs in the two-stage DCF intrinsic value calculator.
Method 2: Benjamin Graham’s formula
Benjamin Graham, author of The Intelligent Investor and Warren Buffett’s teacher, proposed a shortcut for growing companies. In its revised form:
V = EPS × (8.5 + 2g) × 4.4 / Y
EPS is earnings per share for a normal year, not a peak or a trough. 8.5 is the price-to-earnings ratio Graham considered fair for a company with no growth. g is the expected annual growth rate over the next 7 to 10 years, entered as a number (6 for 6%). 4.4 was the average yield of AAA corporate bonds in 1962, and Y is today’s yield on AAA-rated corporate bonds, so the value falls when interest rates rise.
Graham example: Example Corp has EPS of $6.00, expected growth of 6% a year (roughly the average of the DCF’s two stages) and a hypothetical AAA bond yield of 5.0%. V = 6.00 × (8.5 + 2 × 6) × 4.4 / 5.0 = 6.00 × 20.5 × 0.88 = $108.24.
Close to the DCF, but Graham’s growth term is generous. A more conservative modern variant, not Graham’s own, uses 7 + 1g instead of 8.5 + 2g: 6.00 × 13 × 0.88 = $68.64. The gap between $69 and $108 comes mostly from how much each version pays for growth.
Use the formula as a quick first pass for stable, profitable companies. It fails with negative or depressed earnings, flatters cyclicals at peak earnings and ignores debt and cash. Test your own inputs, including the conservative variant, in the Benjamin Graham formula calculator.
Method 3: earnings multiples and earnings power value
The third method asks what similar businesses are worth per dollar of earnings, and what current earnings would justify with no growth at all. Multiples are anchored in market prices, which is their strength and their weakness: if the whole sector is expensive, so is your estimate.
P/E and EV/EBIT cross-check
Suppose comparable US industrials trade at 14 to 17 times earnings. On Example Corp’s EPS of $6.00, that gives $84 to $102 per share. Enterprise value multiples take debt into account: if the same peers trade at 11 to 13 times EBIT, Example Corp’s $800 million of EBIT points to an enterprise value of $8.8 to $10.4 billion; minus $500 million of net debt and divided by 100 million shares, that gives $83 to $99 per share.
Earnings power value (EPV)
Earnings power value, popularized by Bruce Greenwald at Columbia Business School, values today’s sustainable profit as if it never grew: operating profit after tax (assuming maintenance capital spending roughly equals depreciation) divided by the cost of capital, here 8.5%, a little below the 9% cost of equity because it includes cheaper debt. For Example Corp: $800 million × (1 − 21% tax) = $632 million; divided by 8.5% = $7.44 billion; minus $500 million of net debt = $6.94 billion, or about $69 per share.
EPV is a no-growth benchmark. At $80, the market pays about $11 per share for growth; the DCF says that growth could be worth about $36 ($105 − $69). The research question is whether that growth is likely and will earn more than its cost of capital.
Intrinsic value example: from three methods to one value range
| Method | Key assumptions | Value per share |
|---|---|---|
| DCF, base case | FCF $5.00, growth 8% then 4%, discount rate 9%, terminal growth 2.5% | $105 |
| DCF, sensitivity | Discount rate 8% to 10%, terminal growth 2% to 3% | $87 to $133 |
| Graham formula | EPS $6.00, g 6%, AAA yield 5.0% | $108 (conservative variant $69) |
| P/E multiple | 14 to 17 times EPS | $84 to $102 |
| EV/EBIT multiple | 11 to 13 times EBIT, less net debt | $83 to $99 |
| Earnings power value | No growth, 8.5% cost of capital | $69 |
The methods cluster between about $85 and $110 per share, with the no-growth value of $69 as a lower reference point. A sensible way to write the result: intrinsic value estimate $85 to $110, central case about $100, a little below the DCF because the multiples point lower. A range, rather than $104.64, keeps you honest about how much you actually know.
Margin of safety: comparing value and price
The margin of safety is the discount of the price to your intrinsic value estimate:
Margin of safety = (intrinsic value − price) / intrinsic value
At the hypothetical price of $80, Example Corp shows a 20% margin of safety against the central case of $100, but only about 6% against the low end of $85; cautious investors use the low end. Some tools show upside instead, (value − price) / price, which gives 25% here, so check the definition before comparing numbers.
How much is enough depends on how predictable the business is. As a rule of thumb, many value investors look for 20% to 30% with stable companies that have long records, and 40% to 50% with cyclical, indebted or young businesses. A very large discount can also mean the market sees a problem your model misses: the value trap checklist in our guide on how to find undervalued stocks helps tell the two apart.
Common mistakes when calculating intrinsic value
- Letting terminal value do all the work. When it passes about 75% of the total, the forecast period is probably too short or the growth too high.
- Terminal growth above economic growth. Above 3% for a mature US company is hard to defend; close to the discount rate, the result balloons.
- Counting debt twice, or not at all. Cash flow after interest goes with the cost of equity and no debt deduction; cash flow before interest goes with the cost of capital and a net-debt deduction.
- Ignoring dilution. Use diluted shares and treat heavy stock-based compensation as a cost.
- Capitalizing peak earnings. For cyclicals, use average earnings or cash flow over a full cycle.
- Working backwards from the price. Set your assumptions before you look at the quote.
What intrinsic value cannot tell you
Intrinsic value says nothing about when, or whether, the price will move toward your estimate; prices can stay far from any estimate for years. It is only as good as its inputs: one point of discount rate shifts Example Corp’s value by 14% to 19%.
Some businesses do not fit these methods. Banks and insurers have no meaningful free cash flow in the usual sense and are better analyzed on book value and return on equity. Companies with negative earnings break the Graham formula and multiples, and their DCF rests almost entirely on the terminal value. Revisit your estimate when the facts change, after each quarterly report or a big move in interest rates; the stock catalyst calendar tracks upcoming earnings dates, dividends, IPOs and splits.
How Bullish Stock Alerts uses intrinsic value
Our undervalued stock screener covers US-listed stocks and works as a first filter. Its public model estimates fair value from earnings, much like Method 3: positive EPS times a target multiple that starts from a sector default, is adjusted for return on equity, net margin and beta, and stays between 8 and 32. When an analyst consensus target exists, it is blended in at 35%, and bear, base and bull values are shown at 80%, 100% and 120% of the estimate. It is not a DCF; the scoring methodology explains how the score is built.
Valuation counts for 40% of the research-priority score, next to quality (25%), growth (15%), risk (15%) and technical context (5%). The free preview is delayed by at least 24 hours and limited to 8 rows; members see the full list (plans and pricing). Our stock research reports go further: thesis, intrinsic value range, scenarios, catalysts and invalidation points. A high score is a reason to research a company, not a recommendation to buy it.
Intrinsic value FAQ
What is the intrinsic value of a stock?
An estimate of what a share is worth, based on the cash the business is expected to generate for its owners, discounted to today. The market price is simply the last price at which the shares changed hands.
What is the easiest way to calculate intrinsic value?
Graham’s formula needs three inputs: earnings per share, expected growth and the AAA corporate bond yield. A P/E comparison with similar companies is just as quick. Both are rough; use a DCF to see which assumptions drive the value.
How did Warren Buffett calculate intrinsic value?
Buffett defines intrinsic value as the discounted value of the cash a business can produce over its remaining life, but he has never published a formula. He works from “owner earnings”: reported earnings plus depreciation and other non-cash charges, minus the capital spending needed to maintain the business. He has said he discounts at the long-term Treasury rate and handles risk through a margin of safety rather than a higher rate. More in Warren Buffett’s investing lessons.
Is intrinsic value the same as fair value?
In investing the two are often used as synonyms, and research providers call their intrinsic value estimates “fair value estimates”. In accounting, fair value is the price an asset would fetch in an orderly sale between market participants (IFRS 13, ASC 820). Check which meaning a source uses.
Can I calculate intrinsic value in Excel?
Yes. Put years 1 to 10 in cells A2:A11 and free cash flow per share in B2:B11, the discount rate in E1 and terminal growth in E2, as decimals (0.09 and 0.025). In C2, the present value of year 1 is =B2/(1+$E$1)^A2; copy it down to C11. The discounted terminal value is =B11*(1+$E$2)/($E$1-$E$2)/(1+$E$1)^10. Add it to =SUM(C2:C11); =NPV($E$1,B2:B11) returns the same sum in one cell.
Test your own assumptions
Run a two-stage DCF or Graham’s formula on the company you are studying, then browse the screener’s delayed preview of US-listed stocks.
Intrinsic value calculatorGraham formula calculatorUndervalued stock screener
Educational content: Example Corp and its figures are hypothetical and illustrate a method; results are estimates under stated assumptions, not a recommendation on any security.