What is Intrinsic Value of a Stock? | Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

What is Intrinsic Value of a Stock?

How much is a stock worth? The intrinsic value of a stock helps you answer this important question.

Now, you’ll ask that can’t we get the stock’s worth with its share price? Well, the share price of a particular stock is subject to the market volatility and other factors.

That is why analysts use intrinsic value to determine a stock’s true value. It helps determine the present value of all the distributable cash flows the company generates during its lifetime.

It refers to what a stock is actually worth even if some investors think it's worth a lot more or less than that amount.

The intrinsic value is not just for stocks, but for all asset classes.

Your estimate of a stock's intrinsic value will depend on how well you understand the company's business, its long term growth and profitability prospects.

A commonly used method for calculating the intrinsic value is the Discounted Cash Flow (DCF) method. This process involves predicting the future cash flows of a company and discounting them using the weighted average cost of capital (WACC) (debt and equity).

DCF = Future cash flows of the company/WACC

Sometimes, due to external factors, the price of a stock can deviate lower from its intrinsic value. Now, this can be a good time to buy the stock. In the long-term, the price of a stock does converge back to its intrinsic value, allowing you to profit from this temporary deviation.

An effective valuation tool, the intrinsic value metric is useful only in some cases. Unlike the P/E ratio, it can be used to value high-growth stocks that are yet to turn a profit.

For instance, a high-growth tech business is yet to turn a profit. A P/E ratio simply won’t work as there is no profit. However, an investor can predict and make estimates about the company’s future to arrive at the intrinsic value using the discounted cash flow method.

If all this is still confusing for you, we recommend you read our guide on finding the intrinsic value of a stock.


Value Investing is Making a Comeback. Should You Switch from Growth to Value Stocks?

Jun 27, 2022

Is it time to dump your growth stocks now that value investing is making a comeback?

The Best Way to React to the Fall in Hero MotoCorp Stock

Apr 4, 2022

How should one approach the whole Hero MotoCorp case of financial irregularities?

Every Investor Should Learn this Wealth Building Secret

Jan 21, 2022

The secret that separates a successful investor from an unsuccessful one.

Is it Time to Switch from Tata Power to NTPC?

Oct 11, 2021

Given the huge run up in Tata Power, does it make sense to switch to NTPC?

For Champion Investors, God is in this 'Detail'

Apr 29, 2021

Rahul Shah on the habits of highly successful investors.

The Dilemma of Investing in Bharti Airtel

Apr 1, 2021

Rahul Shah on whether Bharti Airtel will emerge as the next big thing in the Indian stock market

Rakesh Jhunjhunwala's Rs 500 Crore Bet on Tata Motors: A Sixer or a Hit-Wicket?

Oct 29, 2020

Rahul Shah discusses Rakesh Jhunjhunwala's Tata Motors Bet from a value investing perspective.

Can You Compress Sound Investing into Just One Sentence?

Sep 24, 2015

Which one investing sentence has the most information in the fewest words?

Who are you really? An 'Investor' or an 'Investrader'

Jun 11, 2015

Bringing in an element of trading every time you invest in stocks from a long term perspective may not bring the best results.

Is this a Good Time to Buy Penny Stocks?

May 10, 2022

Should you be ready to pounce on your favourite penny stocks?

Your Chance to Fall in Love with Investing All Over Again

Jan 24, 2022

Grab this opportunity to push your stock investments into a permanently higher orbit.

How to Use PE Ratio Like a Stock Market Pro

Dec 25, 2021

Rahul Shah discusses the right way of using the PE ratio.

What Will Make You Rich Faster: Investing or Trading?

Jul 9, 2021

Rahul Shah on whether trading or investing will make you a millionaire faster.

The 'Big' Money is in this 'Small' Detail

Apr 29, 2021

Rahul Shah on the habits of highly successful investors.

Adani Green: A Future Multibagger or a Big, Speculative Bubble

Nov 26, 2020

Rahul Shah discusses the hype around Adani Green Energy and analyses whether it is justified.

How Investors Lost Money on the Greatest Event in India's Economic History

Jul 28, 2016

The frothy stock markets post the 1991 liberalisation of the Indian economy led to investors losing a lot of money.

Turnaround story vs. Boring business: Which is better?

Jul 22, 2015

Do turnaround stories really turnaround and make better bets than stable businesses?


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jul 4, 2022 (Close)

MARKET STATS




Yellow Ad

Advertisement

Last Day to Access 'One Stock Crorepati' Opportunity

As you know, recently we went LIVE with our One Stock Crorepati MEGA Summit...

Around 10,000 readers like you had registered to attend this summit.

At the summit, they learned Richa Agarwal's secret blueprint of identifying potential 'crorepati' stocks.

Plus, they also discovered the details of one stock with crorepati potential...

If you missed this summit for some reason, then you can still get all the details by watching this special replay of the summit.

Learn more