What is Intrinsic Value?
Intrinsic value is what a business is actually worth — independent of what the market currently pays. Warren Buffett defines it as "the discounted value of the cash that can be taken out of a business during its remaining life."
When the market price is below intrinsic value, you have a margin of safety: a buffer that protects you when your estimates are wrong. This is the entire foundation of value investing.
The challenge is that intrinsic value is not a single number — it is a range, and different methods produce different estimates. That is why smart investors run multiple valuation models and compare.
The 4 Valuation Methods Every Investor Needs
1. Discounted Cash Flow (DCF)
The DCF model projects free cash flow 10 years into the future, then discounts every future dollar back to today's value. The discount rate reflects your required annual return — typically 10% for a solid business.
The maths:
Free Cash Flow = Operating Cash Flow − Capital Expenditures
Intrinsic Value = Sum of (FCF × Growth^Year / Discount^Year) + Terminal Value
Example — Apple (AAPL): With $95B FCF, 6% growth, 10% discount rate:
The total of those discounted cash flows plus a terminal value (assuming 2.5% growth forever after year 10) gives the enterprise value. Subtract debt, add cash, divide by shares outstanding — and you have intrinsic value per share.
2. Graham Number
Benjamin Graham's formula provides a conservative price ceiling for any stock:
Graham Number = √(22.5 × EPS × Book Value Per Share)
The 22.5 constant comes from Graham's rule: no stock should trade above 15× earnings AND 1.5× book value. Multiply those two limits: 15 × 1.5 = 22.5.
This is a fast sanity check, not a complete model. It works best for mature, asset-heavy businesses: banks, manufacturers, utilities.
3. Dividend Discount Model (DDM)
Values a stock on the present value of all future dividends. The Gordon Growth Model formula:
DDM Value = D₁ ÷ (Required Return − Dividend Growth Rate)
Where D₁ is next year's dividend. This is particularly powerful for ASX stocks due to fully franked dividends — a $2.00 fully franked dividend is worth ~$2.86 gross to an Australian taxpayer.
4. Earnings Power Value (EPV)
The most conservative of the four. EPV assumes zero growth — it values purely on today's earnings power:
EPV = NOPAT ÷ Cost of Capital
Where NOPAT = EBIT × (1 − tax rate). This is the floor value of the business if it never grows again. If the market price is below EPV, the stock is extremely cheap on any assumption.
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Value Calc pulls live financials from market feeds and fills DCF, Graham, DDM & EPV inputs automatically. Standard plan gives you unlimited calculations, watchlist, and earnings calendar.
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Each method has structural blind spots:
| Model | Strength | Weakness |
|---|---|---|
| DCF | Captures growth value | Sensitive to growth assumptions |
| Graham | Conservative floor | Ignores intangible value |
| DDM | Captures income value | Only works for dividend payers |
| EPV | No-growth floor | Too conservative for growth stocks |
The Average Intrinsic Value — the mean across all four models — smooths these biases. When all four agree a stock is undervalued, the signal is far stronger than any single model.
The Margin of Safety
Once you have intrinsic value, do not buy at that price. Buy at a discount — your margin of safety.
A 25% margin of safety on a $100 IV stock means a buy price of $75. You can be 25% wrong in your assumptions and still not lose money.
Buffett uses 25-50% depending on business quality. The more uncertain the business, the larger the buffer you need.
Running All Four Models
The fastest way to run all four is to use the calculator above. Enter a ticker, click Autofill Data, and the tool fills in operating cash flow, capex, EPS, book value, dividends, and EBIT from live market feeds. Then set your assumptions and calculate.
Value Calc Standard gives you unlimited calculations across all four models. Pro adds the Average Intrinsic Value indicator and AI-generated stock analysis reports.