**To calculate the intrinsic value of a stock, you estimate a company’s future cash flow, discount it by the compounded inflation/interest rate, and divide the result by the number of shares outstanding. This gives you the fair value price you should pay for a stock. **

The Intrinsic Value or Fair Value of stock estimates a stock’s value without regard for the stock market’s valuation. Firstly, we will uncover how Warren Buffett calculates Intrinsic Value using the Discounted Cash Flow Model (DCF). I will show you the most effective way to automatically calculate the intrinsic value for all the stocks in the USA.

## Intrinsic Value of Stock

The intrinsic value of a stock is calculated by estimating the future cash flow (FCF) of a business, usually for the next ten years. This cash flow is discounted in each future year based on variables such as interest or inflation. The total discounted cash flow (DCF) is then divided by the number of shares outstanding to give the per-share intrinsic value.

If, for example, the intrinsic value of a stock is 30% higher than the current market stock price, that means a share of the company has a margin of safety of 30%.

## Intrinsic Value Calculation Formula

**Intrinsic Value = [FV _{0 }/(1+d)^{0}] + [FV_{1 }/(1+d)^{1}] + [FV_{2 }/(1+d)^{2}] + …..+ [FV_{n }/(1+d)^{p}**

**FV**= Net cash flow (inflow or outflow) for the_{x}_{j}th period (for the initial “Present” cash flow, x = 0)**d**= Discount Rate – Annual rate of interest or Inflation**p**= Number of periods to be included

This all looks rather complicated, so let’s look at how the calculation works.

## How To Calculate Intrinsic Value – Buffett Model

- Take the free cash flow of the first year and multiply it by the expected growth rate.
- Then calculate the NPV of these cash flows by dividing it by the discount rate.
- Project the cash flows ten years into the future, and repeat steps one and two for all those years.
- Add up all the NPVs of the free cash flows.
- Multiply the 10th year with 12 to get the sell-off value.
- Add up the values from steps four, and five, and Cash & short-term investments to arrive at the intrinsic value for the entire company.
- Divide this number by the number of shares outstanding to arrive at the intrinsic value per share.

Warren Buffett, the greatest investor of all time, prefers to use this model, also known as the Discounted Cash Flow Model.

By taking the current and estimated net income for the next ten years, reducing its value to the present value (Net Present Value) due to inflation, then dividing that by the outstanding number of shares, you get the intrinsic value per share. This calculation is the price you should pay for a stock, not what the stock market says you should pay.

## Calculate Intrinsic Value Using Excel – Download

An easy way to calculate intrinsic value and the famous Warren Buffett Margin of Safety is to use an excel spreadsheet.

We have done the work for you; our simple-to-use Excel Sheet provides all the information & calculations you need to easily determine the intrinsic value of a company’s stock.

Download the Intrinsic Value & Margin & Safety Excel Calculator .xls

## The Best Intrinsic Value Calculator

The best intrinsic value calculator is **Stock Rover**, which automatically calculates Fair Value, Academic Fair Value, Intrinsic Value, Intrinsic Value to Sales, and the intrinsic Value Exit Multiple for all US stocks.

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While it is easy and free to use an excel sheet to calculate Intrinsic Value and Margin of Safety for an individual stock, it is not very productive. You need to enter the values for each company individually. If you want to scan through thousands of stocks to find the kind of investments that meet Warren Buffett’s or Ben Graham’s criteria, you will need a stock screener.

## The Best Stock Screener for Intrinsic Value

**Stock Rover automatically calculates Intrinsic Value and Fair Value, a key Benjamin Graham and Warren Buffett criteria, in 5 different ways:**

- Fair Value – using a discounted cash flow analysis to determine the Intrinsic Value
- Fair Value (Academic) – A company’s Fair Value (Academic) uses a discounted cash flow analysis that forecasts cash flows into perpetuity.
- Intrinsic Value (Academic) – the intrinsic value of a company is determined by adding the Net Present Value of Cashflows and the Terminal Value (Academic)
- Intrinsic Value EV to Sales – the company’s intrinsic value is determined by comparing its EV / Sales ratio vs. industry norms.
- Intrinsic Value Exit Multiple – the intrinsic value of a company is determined by adding the Net Present Value of Cashflows and the Terminal Value Exit Multiple

Stock Rover has over 150 pre-built screeners; you will need the **Premium Plus** service to unlock the Warren Buffett & Benjamin Graham metrics.

The best stock screener that automatically calculates Fair Value, Intrinsic Value, Margin of Safety, and hundreds of other important fundamental & financial calculations is Stock Rover, our review-winning recommended software.

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## The Margin of Safety – What You Should Pay for A Stock

Now that you know the intrinsic value per share, you can compare that to the actual share price. If the intrinsic value is more than the actual share price, that will constitute a value investment.

Warren Buffett likes a margin of safety of over 30%, meaning the stock price could drop by 30%, and he would still not lose money.

**[Related Article: 4 Steps to Build Your Own Warren Buffett Stock Screener – Tutorial]**

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## Alternative Intrinsic Value Calculations

There are many formulas for calculating Intrinsic Value because Intrinsic Value is a matter of opinion.

To clarify, analysts and investors disagree on intrinsic value and how to calculate it. For example, value investors look at cash, assets, and cash flows. However, growth investors may examine intangible assets like patents, intellectual properties, strategies, business plans, brand names, reputations, and copyrights.

For example, many people regard copyrighted fictional characters, like Luke Skywalker, Darth Vader, Spider-Man, Iron Man, and Captain America, as part of the Walt Disney Company’s (NYSE: DIS) Intangible Value. In addition, most of Procter & Gamble’s (NYSE: PG) potential value comes from popular brands like Tide.

## Intrinsic Value vs. Book Value

A company’s Book Value is the value of all its physical, financial, and legal assets. For example, the money in the company’s accounts, accounts receivable, inventory, real estate, patents, assets, equipment, etc.

Book Value is a good way to think of the number of money creditors could receive if a bankruptcy court liquidates the company. However, Book Value does not consider such factors as management, corporate culture, business plans, and consumer loyalty. Also, Market Capitalization is not part of book value.

The easiest way to estimate Book Value is to subtract a company’s liabilities from its assets. For instance, Apple (NASDAQ: AAPL) had assets of $341.998 billion and liabilities of $93.772 billion in March 2019. Consequently, you can estimate Apple’s Book Value at $248.226 billion.

Comparing Book Value to your estimates for Intrinsic Value can give you an idea of how other people are pricing a company.

## Price to Earnings Ratio vs. Intrinsic Value

Many people use the Price to Earnings (P/E) Ratio or Price Multiple, but it is not an estimate of stock value. Instead, the PE Ratio estimates the value of a stock’s earnings.

Generally, analysts use the P/E Ratio to compare the earnings of different stocks. You can also compare current and historical P/E Ratios to learn the consistency of a stock’s earnings.

A classic P/E Formula is the stock price divided by the Earnings Per Share (EPS). You must pay attention to the P/E Ratio because it is the most popular stock analysis formula.

However, the P/E Ratio is a short-term analysis tool that has little effect on Intrinsic Value. On the other hand, speculators watch the P/E Ratio because it can affect short-term market prices. Hence, the P/E Ratio can indicate a stock’s future market performance.

## Formulas for Calculating Intrinsic Value

However, several formulas can give you a rough estimate of the Intrinsic Formula. Understanding and utilizing these formulas can make valuing and understanding stocks easier.

### 1. The Dividend Discount Model

The simple idea behind the Dividend Discount formula for estimating Intrinsic Value is that cash is king.

A simple means of calculating the Dividend Discount is to use the Time Value of Money method. To calculate the Time Value add the number of future dividends to the current stock price.

To determine Walmart’s (NYSE: WMT) Intrinsic Value next year, you would add four quarters of dividends to Walmart’s stock price ($100.04 on May 15, 2019). Since Walmart will pay a 53₵ divided on June 3, 2019, its Intrinsic Value could be $102.28.

Hence, a dividend investor will spend $100.04 to get $2.24 in dividends. Thus, you can determine if $2.24 is worth $100.04 if you purchase Walmart stock for the dividend.

#### The Problems with the Dividend Discount Model

The Dividend Discount Model’s problem is that a company’s management can end the dividend; or change it at any time. For instance, a company that pays a quarterly dividend could switch to annual dividends. Moreover, some companies will occasionally issue big bonus dividends.

Unfortunately, the Dividend Discount Model only works with stocks that pay dividends. Hence, the Dividend Discount Model is useless for companies such as Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), and Berkshire Hathaway (NYSE: BRK.B), which refuse to pay dividends.

### 2. Discounted Cash Flow Model – How Warren Buffett calculates Intrinsic Value.

Interestingly, Warren Buffett bases his Intrinsic Value calculations on future free cash flows. To explain, Buffett thinks cash is a company’s most important asset, so he tries to project how much future cash a business will generate.

The usual formula for estimating future Free Cash Flows is the Discounted Cash Flow Method. Here is an example of a simple Discounted Cash flow Method

- Take the free cash flow of the first year and multiply it by the expected growth rate.
- Then calculate the NPV of these cash flows by dividing it by the discount rate.

*Note: the NPV refers to the Net Present Value or the present value of money. You calculate the Net Present Value by subtracting the discount rate from the money’s future value and multiplying it by the number of years you are measuring.*

- Project the cash flows ten years into the future, and repeat steps one and two for all those years.
- Add up all the NPVs of the free cash flows.
- Multiply the 10th year with 12 to get the sell-off value.
- Add up the values from steps four, five, and Cash & short-term investments to arrive at the intrinsic value for the entire company.
- Divide this number with the number of shares outstanding to arrive at the intrinsic value per share.

The advantage of the Discounted Cash Flow Method is that it is simple. The problem with this method is that Free Cash flows can vary dramatically from year-to-year. Thus, the final figure from this method is guesswork.

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## The Limits of Intrinsic Value

Intrinsic Value is nothing but an estimate in the final analysis because there is no guarantee that future numbers will match the ones you use.

Intrinsic Value estimates are often wrong because they exclude outside factors that can change a company’s price. For instance, the oil price determines the value of an oil company like **Exxon-Mobil (NYSE: XOM)**.

Consequently, any change in oil prices can cause Exxon-Mobil’s free cash flow to go up and down. Thus, calculating the Intrinsic Value of oil companies is tough.

Therefore, Intrinsic Value is just one of many tools you should use to analyze stocks. Over-reliance on Intrinsic Value can cost you money by giving you an unrealistic picture of stock values.

## Summary: How to Calculate Intrinsic Value

Understanding Intrinsic Value is important for all value investors, but calculating it manually is labor-intensive and counter-productive. Using our Screener Review Winning Stock Screener, Stock Rover will enable you to find the most undervalued companies on the NYSE, or NASDAQ exchanges, simply and effectively.

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Hi Barry,

I’ve Modeled your IV Calculator in Excel.

It matches your results beautifully.

My question is: Where do you get your data from to feed the IV Calculator ?

I’m having difficulty finding reliable data to evaluate for example, a company like BRK.B.

Greatly appreciate your time in responding.

Phil

Hi Philip, thanks for the great question.

That is where the art in the science kicks in. In the section “How To Calculate Intrinsic Value” you need to estimate the company’s cash growth rate and then discount it into the future. It is the toughest part of the calculation, because that is the prediction you have to make. Try running models with different growth rates. How long will the company’s market dominance last, what are the competitive threats?

Barry

Hi, is initial cash flow referring to FCF?

Yes the first year

Hi, for the initial cash flow, are you referring to the latest financial year Free Cash Flow?

Hi Daren, Yes see “1. Take the free cash flow of the first year and multiply it with the expected growth rate”

How is the discount rate calculated? This is not the WACC discount rate right?

Hi Elliott, it is similar, just one is weighted the other not.

In the sample excel spreadsheet for MSFT, how did you calculate the “Value” column and what does the “Value” column represent? Thanks.

Hi Mike, Value is calculated as the discounted cash flow of the business over the next 10 years combined.

Hi Thibaud, Well, this is the art of using this strategy, do you expect the company to continue growing or expect growth to slow. You can input different expectations into the calculation to envisage different scenarios. You need to estimate these figures yourself.

Barry

Hi there,

I do not understand how you find your estimate growth rate, especially for years 6-10.

Thanks for your reply