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What intrinsic value means
Intrinsic value is an investor's estimate of a company's true worth, built from things like its earnings, cash flow, growth prospects, and financial health. It answers the question of what the business is really worth, rather than what people are paying for it right now.
The market price and intrinsic value are not the same thing. Price is set by supply and demand from moment to moment, while intrinsic value is a considered judgment about the underlying business. The two can drift apart, sometimes widely.
How investors estimate it
One common approach values a company by the cash it is expected to generate in the future, then discounts those future amounts back to today because money later is worth less than money now. This is known as a discounted cash flow estimate.
Other approaches compare a company to similar businesses using measures like the price-to-earnings ratio, or focus on assets and book value. Every method relies on assumptions, so intrinsic value is always an informed estimate with a range, never a single exact number.
💡 It is a range, not a precise figure:Because intrinsic value depends on assumptions about the future, careful investors think in terms of a reasonable range rather than one exact price. Small changes in growth or discount assumptions can shift the estimate meaningfully.
Price, value, and margin of safety
When a stock trades well below an investor's estimate of intrinsic value, value investors describe it as trading at a discount. When it trades well above, it may be considered expensive. The gap is where opportunity and risk live.
Because estimates can be wrong, many value investors look for a margin of safety, meaning they aim to buy only when the price is comfortably below their estimate of value. That cushion protects against mistakes in the assumptions.
What to keep in mind
Intrinsic value is only as good as the assumptions behind it. Two thoughtful investors can reach different figures for the same company, and the future rarely unfolds exactly as modeled.
It is best treated as a disciplined way of thinking rather than a precise answer. The goal is not to pin down a perfect number, but to avoid overpaying and to understand what you would need to believe to justify a given price.
Frequently asked questions
What is intrinsic value in simple terms?
It is an estimate of what a company is genuinely worth based on its fundamentals, such as earnings and cash flow, rather than the price the market is quoting. Investors compare their estimate of intrinsic value to the share price to judge whether a stock looks cheap or expensive.
How do you calculate intrinsic value?
A common method estimates the cash a company will generate in the future and discounts it back to today’s value. Others compare the company to peers using ratios or focus on assets. All methods rely on assumptions, so the result is an informed range rather than an exact figure.
Why is intrinsic value different from the stock price?
Price is set by supply and demand and shifts with mood and news, while intrinsic value is a judgment about the underlying business. Because emotions and short-term factors move prices, they can trade above or below a reasonable estimate of a company’s worth.
What is a margin of safety?
It is the practice of buying only when the price sits comfortably below your estimate of intrinsic value, leaving a cushion in case your assumptions are wrong. The idea, associated with value investing, is to reduce the damage from mistakes and unexpected events.
Related tools and pages
These are for learning. Any calculator here shows example scenarios, not predictions of future prices.
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