How to Calculate Intrisic Value

Determining Intrinsic Value

In the world of investments there are two ways to analyze stocks: technical and fundamental analysis. Technical analysis looks at historical price and volume trends to make predictions on future price changes. Fundamental analysis compares the current market value to the actual or book value of the asset. This is also known as the intrinsic value of an investment. One of the most common ways investors find intrinsic value is through a measure referred to as the Price to Earnings ratio or PE ratio.

Instructions

1. Determine the price for the stock you are trying to calculate the intrinsic value for. You can do this by looking up the stock on any reputable investment research site. Let's say the price of one share of stock in XYZ company is $10.

2. Determine the earnings per share for the company. The earnings per share is located on the income statement which can be found in the annual report or 10K. Most companies provide these documents on their website under Investor Relations. If not, as your broker or download from your favorite investment research site. Let's say the earnings per share for XYZ company are $.50.

3. Divide the price by the earnings per share. The answer is 10 / .5. the answer is 20.

4. Look up the average P/E ratio for companies in the same industry. This can be found on most investment research sites by looking up the statistics for the industry instead of the company. You can also ask your broker. Let's say the average PE ratio for the XYZ company's industry is 15. A high PE ratio is an indication that the company is overvalued, however, if the PE ratio for the company is lower than the industry average it means the company is undervalued.

5. Calculate the intrinsic value. Divide the industry PE by the earnings per share for the company. The equation is 15 * .5 or $7.50. This also provides you with an indication for the intrinsic value of the stock or the real market value of the stock given its current earnings compared to the industry. According to this methodology, the stock is overpriced by $2.50 compared to comparable stocks in the same industry.

References

• Investopedia: Intrinsic Value