How to Determine a Stock's Intrinsic Value

Figuring stock value

The intrinsic value of a stock can be difficult for investors to determine. Most investors are accustomed to looking at the market values of stocks that show the rise and fall of international markets. Intrinsic value indicates the true value of a particular business based on ephemeral factors like research, brand identity and market psychology. Every investor can find the intrinsic value of a bond, security or stock with a few simple calculations.

Things You'll Need

• Daily stock reports in paper
• Calculator

Instructions

1. Eliminate poorly run businesses from intrinsic value calculations by starting with a cash flow analysis. Experienced investors will project annual revenues and expenses for the next decade before taking the trouble to calculate intrinsic value. These calculations should be adjusted based on a reasonable interest rate to account for changes in lending and inflation.

2. Utilize the current interest rate on government bonds as a way to differentiate market value from intrinsic value. These bonds are designed as stable investments for people who want low but steady growth.

3. Divide the government bond rate by last year's earnings estimate on a particular stock to find intrinsic value. An investor calculating an earnings estimate of $6 divided by a bond rate of 2.5 percent will get an intrinsic value of $240.

4. Write down the potential return percentage of a stock based on its intrinsic value by dividing last year's earnings estimate by the stock's current market value. An investor who divides an earnings estimate of $6 by a market value of $75 will get a return percentage of 8 percent. Most investors choose stocks with intrinsic values that earn at least twice the return rate on government bonds.

5. Stay committed to a margin of safety that fits your investment philosophy. The margin of safety is a figure that measures the difference between market and intrinsic values. A stock holder with a 50 percent margin of safety looking at a stock with a $30 market value will need to find an intrinsic value of at least $45 before investing.

6. Adhere to the intrinsic value you calculated for each stock in order to realize larger dividends down the road. Novice investors may dump their stocks during a brief upward swing in the market without looking ahead to bigger improvements in subsequent weeks and months.

Tips & Warnings

• Calculate the intrinsic values of startups and established companies in a particular market sector to compare your holdings against the market. These values allow investors in automotive companies, software firms and agricultural concerns to find fast-rising investment opportunities. Update your market sector analysis daily to stay on top of sudden changes in the market.

• Avoid irresponsible use of intrinsic values by considering the price parity between different market sectors. Value investors with low-risk thresholds should choose construction and agricultural stocks that grow steadily over time. Investors who are willing to risk big losses should pursue areas like green technology with high intrinsic values, but little history on the market.

References

• FocusInvestor: Intrinsic Value Calculator