What is intrinsic value?
Intrinsic value is an estimate of what a business is worth based on its fundamentals — earnings, cash flow, assets — rather than on its share price. The idea goes back to Benjamin Graham and David Dodd’s Security Analysis (1934). It is always an estimate: different methods, and different assumptions, give different numbers. Graham’s answer to that uncertainty was the margin of safety: only treating a price as interesting when it sits well below a cautious estimate.
The four methods
DCF per share = present value of free cash flow per share over the growth years + terminal valueGraham formula = EPS × (8.5 + 2 × growth in %) × 4.4 ÷ AAA bond yield in %Graham number = √(22.5 × EPS × book value per share)Earnings multiple = EPS × the P/E you consider reasonable- The DCF values the cash the company generates; it is the most complete method and the most sensitive to its inputs.
- Graham’s formula prices growth: 8.5 is the P/E he gave a company with no growth, and the 4.4 ÷ Y factor, added later, adjusts for interest rates (4.4% was the AAA yield of his day).
- The Graham number caps what a defensive investor should pay: a P/E of 15 times a price-to-book of 1.5 gives 22.5. It ignores growth entirely.
- The earnings multiple is the simplest: it is only as good as the P/E you choose.
With the starting values (a fictitious company with earnings of 2 per share, book value of 16, free cash flow of 1.8 and 8% growth), the four methods range from about 27 to 43, with a median near 33.
Reading the result
Look at the spread before the median. A narrow range means the methods agree; a wide one means the result hinges on one assumption — usually growth. The Graham number, which ignores growth, often sits below the others for growing companies; Graham’s formula often sits above them when growth is high. None of the four is "the" value.
Limits
- They all need positive earnings or cash flow; companies with losses need other approaches.
- Book value means little for companies whose assets are mostly intangible (software, brands).
- Graham designed his formulas for stable industrial companies of his time; treat them as references, not rules.
- Banks and insurers need specific methods.
To explore the DCF in depth, with a sensitivity table, use the DCF calculator.
In InvestIQ
InvestIQ’s Stock Analysis compares several valuation methods for each company, from its own data, and its scoring engine reads valuation relative to the sector. How it works is in the methodology.