How to calculate intrinsic value
Intrinsic value is what a business is really worth — separate from whatever its share price happens to be today. Here's how to work it out step by step, with a full worked example, and how to turn it into a margin of safety.
What "intrinsic value" actually means
A share is a slice of a real business. Its intrinsic value is an estimate of what that slice is worth based on the cash the business will generate over its life — not on market sentiment, headlines, or what someone will pay for it this afternoon. The whole point of value investing, going back to Benjamin Graham, is to buy when the price sits comfortably below the value.
The most widely used way to estimate it is a discounted cash flow (DCF) model. The logic: money in the future is worth less than money today, so you forecast a company's future cash, then "discount" it back to today's terms.
The intrinsic value formula
At its core, a DCF adds up every future year's free cash flow, each shrunk by a discount rate, then adds a terminal value for everything beyond the forecast window:
Where FCF = free cash flow, r = the discount rate (the return you require, often the company's weighted average cost of capital), and n = the year number. Divide the total by the number of shares to get intrinsic value per share.
Step by step
- Forecast free cash flow for the next 5–10 years. Start from the company's current free cash flow and apply a sensible growth rate.
- Pick a discount rate (r). This reflects risk; a common range for a stable large company is 8–10%.
- Discount each year back to today: divide year n's cash flow by (1 + r)n.
- Add a terminal value for the years beyond your forecast, then discount that back too.
- Sum it all up and divide by the share count to get value per share.
- Compare to the price to get your margin of safety.
Worked example
Say a company generates £100m of free cash flow today, you expect it to grow 8% a year, and you require a 10% return (r = 0.10). Here are the first five years discounted to today:
| Year | Free cash flow | ÷ (1.10)ⁿ | Present value |
|---|---|---|---|
| 1 | £108.0m | 1.10 | £98.2m |
| 2 | £116.6m | 1.21 | £96.4m |
| 3 | £126.0m | 1.33 | £94.6m |
| 4 | £136.0m | 1.46 | £92.9m |
| 5 | £146.9m | 1.61 | £91.2m |
The five years of discounted cash flow add up to about £473m. Add a discounted terminal value (here, roughly £1,460m using a long-term growth assumption), and the total intrinsic value is about £1,933m. If the company has 100m shares, that's an intrinsic value of ≈ £19.30 per share.
If the stock trades at £12, the gap is your opportunity. If it trades at £25, the market is already pricing in more than your model supports.
Turning it into a margin of safety
Intrinsic value on its own is just a number. The discipline that protects you is the margin of safety — how far below intrinsic value you're buying:
In the example, buying at £12 against a £19.30 value is a margin of safety of about 38%. The bigger that cushion, the more your forecasts can be wrong and you'll still do alright. Graham's whole framework rests on this gap.
The honest caveat: a DCF is only as good as its assumptions. Small changes to the growth rate or discount rate move the answer a lot, so it's a guide, not a guarantee. Always sanity-check it against simpler measures (like how the company is priced versus its sector) before drawing conclusions.
The shortcut
Doing this by hand for one company is instructive. Doing it for a thousand is not. Oak Growth computes intrinsic value by DCF for roughly 1,000 companies across nine markets and shows the margin of safety on each — the full approach is in our methodology.
See intrinsic value computed for 1,000+ stocks →