How to Calculate Intrinsic Value (Step-by-Step)

What intrinsic value actually means

Intrinsic value is the cash a business will generate over its remaining life, discounted back to today. That's it. Every other formula — DCF, Graham, dividend discount, owner earnings — is a different way to estimate that same number. The market price is what someone else will pay for the stock today. Intrinsic value is what the business is actually worth.

Buffett's framing: "Intrinsic value can be defined simply: it is the discounted value of the cash that can be taken out of a business during its remaining life."

Method 1: Discounted Cash Flow (DCF)

DCF projects a company's free cash flows for the next 10 years, applies a terminal value for everything beyond, and discounts the whole stream back to today using a discount rate.

The 5 inputs you need

1. Starting free cash flow. Use the trailing-12-month FCF or a normalized 3-year average.
2. Growth rate (years 1-10). Anchor to historical growth and competitive position. Be conservative — most companies grow slower than recent years suggest.
3. Terminal growth rate. Usually 2-3% (long-term GDP/inflation). No business grows faster than the economy forever.
4. Discount rate. 8-10% for stable wide-moat businesses, 10-12% for average quality, 12-15% for cyclical or uncertain.
5. Share count. Diluted shares outstanding, including expected buybacks/dilution.

Worked example

Imagine a company generating $10B in FCF, growing 6% for 10 years, then 2.5% terminal growth, discounted at 9%:

• Sum of years 1-10 discounted FCF: ~$92B
• Terminal value (year 10 FCF × multiple): ~$220B, discounted back: ~$93B
• Enterprise value: ~$185B
• Divide by share count (say 2B shares): ~$92/share intrinsic value

If the stock trades at $70, you have a 24% margin of safety. If it trades at $100, you're paying full price.

Method 2: The Graham Formula

Benjamin Graham's simpler shortcut, designed before spreadsheets:

Intrinsic Value = EPS × (8.5 + 2 × growth%) × (4.4 / AAA bond yield)

The 8.5 represents the P/E of a no-growth company. Growth adds to it. The bond-yield adjustment normalizes for interest-rate environments. It's quick, dirty, and surprisingly useful as a sanity check on DCF outputs.

Why your number will be wrong (and that's fine)

Every intrinsic value estimate is a range, not a point. A 1% change in your discount rate can shift the answer 15-20%. Buffett's response: demand a margin of safety wide enough to absorb your errors.

• For wide-moat, predictable businesses: 15-25% discount to intrinsic value
• For average-quality businesses: 30-40% discount
• For cyclical or low-visibility businesses: 40-50% discount, or skip entirely

The 5 most common mistakes

1. Extrapolating recent growth. If a company grew 25% last year, that doesn't mean year 5 will look the same. Mean-revert hard.
2. Ignoring share dilution. Stock-based compensation quietly transfers value from owners to employees. Use diluted share counts going forward.
3. Using net income instead of free cash flow. Accounting earnings can be massaged. Cash is harder to fake.
4. Forgetting maintenance CapEx. Capital-intensive businesses look more profitable than they are if you use reported earnings instead of owner earnings.
5. Reverse-engineering to justify the price. If you have to assume 20% growth for 15 years to make the math work, you're not valuing — you're rationalizing.

Use a calculator, but understand it

Our free intrinsic value calculator runs both DCF and the Graham Formula on any inputs you provide. It also outputs a sensitivity table so you can see how the value changes as your growth and discount assumptions change. That sensitivity table is more important than the headline number.