How To Calculate Intrinsic Value (Full Example)

A step by step guide on calculating the intrinsic value of a stock. I've tried to make this as simple as possible. Hope it helps!

Link To Spreadsheet Calculator (Click File – Download – Excel):

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Intrinsic value, is arguably the most important thing to know when it comes to investing. Because if you can’t calculate the intrinsic value, then how do you know if you’re getting a good deal for the stock. How can you tell if you’re not overpaying? No intrinsic value = no idea if the stock is worth buying or not. As Warren Buffett says “the critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price”.

So that brings us to the question, well how do we calculate the intrinsic value of a stock? That is what this whole video is going to be dedicated to. A simple step by step guide on calculating the intrinsic value of a stock.

How To Calculate The Intrinsic Value Of A Stock

Ok, Warren Buffett makes the definition of intrinsic value crystal clear. He said “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”. So we look at the business. We determine how much cash it will generate over time. And then we discount these cash flows back to the present day.

In order to do this calculation we need 3 ingredients. 1 is the current cashflow. 2 is the cashflow growth rate. And 3 is the discount rate in order to discount the cash flows back to the present day and determine our current intrinsic value…

Step 1: Find The Cashflow Of The Stock

The reason why Buffett specifically said cashflow, instead of earnings is because earnings can easily be manipulated by the management team. But on the other hand, it is extremely hard almost impossible to manipulate the actual physical cash flows that a business generates. Put simply cash flow is more reliable than earnings.

So to find the cashflow it’s pretty easy in the modern day, all thanks to the internet. For this example I’m going to use Apple stock, since that’s quite a well-known talked about stock, even Warren Buffett owns it himself…

So the website that we use to get these metrics is called gurufocus. So let’s type in, Apple stock gurufocus… Than what we want to do is go to the DCF section. Discounted Cash Flow. And if we just zoom in right here, it will tell us what the current cash flow is for Apple stock. Right now, the free cash flow is $5.57. So remember that figure because we’re going to be using it soon. But before we need to determine what the growth rate is going to be for that cash flow…

Step 2: Determine The Cash Flow Growth Rate

Remember that Buffett said to calculate the intrinsic value, you need to discount the future cash flows of the business. In order to know the future cash flows, we need to know how much the current cash flow is going to grow by.

So for Apple the example that we’re using the current cash flow is $5.57. What will the growth rate be for this?

One of the best ways of determining future growth rate is by looking at the growth rate in the past. Then you can extrapolate this into the future. But you want to be conservative, and make it somewhat lower, since businesses grow faster at the beginning and start slow down.

So to find Apple’s past cash flow growth rate, just go to the exact same place that we were at before. Here is where we found the current cash flow. And here is where we see the past cash flow growth rates.

So don’t worry about the 1 year growth rate, it’s better to focus on the longer term ones. So over the past 5 years Apple has had an 8% growth. And the past 10 years it’s had 16.2% average yearly growth. If we look at the growth in earnings per share, it’s around the same numbers..

So in the future we can say that over the next 5 years we might see an 8% growth and the 5 years after that we might see around a 6% growth.

And now we have 2 of the key ingredients that we need to put into our formula for intrinsic value.

[MalcolmHamlin]

I feel investors should focus on under-the-radar stocks, considering the current rollercoaster nature of the stock market, Because 35% of my $270k portfolio comprises plummeting stocks that were once revered. I don't know where to go here out of devastation.

[dominicbailey]

I have been watching some videos and I was thinking about investing in bitcoin or forex, but still don't know where to start from, any recommendation?

[matteoma]

This video is amazing. Thank you for explaining intrinsic value that simple, other people really ain't able to explain what intrinsic value is.

[InvestorCenter]

That point about why you use cash flow instead of earnings is great. Earnings can be easily manipulated and are an accounting based metric that doesn’t always reflect underlying business reality. Cash flow on the other hand, doesn’t lie

[jamesklucky]

I love this video and really appreciate the explanation. It would be so awesome if you did a livestream and took five companies and repeated the process going through the steps. Maybe even a pay per view event 90 minute session. Anyway the one area that was confusing was the terminal value step. Everything else made sense based on data but was not sure how you come up with best estimate based on type of stock or space or industry the stock represents. How much goodwill or longevity comes into play or other factors. thank you.

[HuddoModz]

If you want to go a bit more in depth with a DCF, the way Buffett actually calculates intrinsic value is actually net income + Depreciation and Amortisation + change in deferred tax- maintenance capital expenditure + change in working capital. That provides a much clearer indication of forecasted cash flows available to an investor

[matthewmanucci]

Are you wondering where the multiple 26.9 came from? Scrolling through the comments trying to find anyone to explain it. Here is the explanation. The CF multiple in the video is determined by dividing the current stock price, in the case of this video it was $154.30, by the cashflow price, $5.57. So 154.30/5.57. Now if you have pulled out your calculator, and done that equation, you will notice that the variable you get is not 26.9, but rather 27.7. Why does the video say 26.9? We don't know. No one in the comments does and the video is 6 months old, so you will likely not recieve a response to this question. But now you have the answer to how you get the CashFlow multiple, so you can start calculating intrinsic value with that helpful spread sheet.
God bless!

[SmartMoneyBro]

You are expressing FCF as a dollar figure. Everywhere I look, FCF is expressed as a percentage. How do we turn that percentage into a dollar figure like you have here. Or vice versa. Assuming I don't have access to the website you pulled this FCF figure from??

[AlfaKlo]

Literally what i needed to learn even more! Thank you!

[djramz]

Fantastic and very clear video on how to determine the intrinsic value of a stock and thank legend for providing the us with spreadsheet, can't thank you enough!! 🙏🙏

[abigaillucas]

I have been watching some videos and I was thinking about investing in bitcoin or forex, but still don't know where to start from, any recommendation?

[Kelmorin]

Really enjoyed the video! How did you arrive at 8 and 6% for growth rates in the future? Also, where do you get the cashflow multiple?

[MartysHairline]

this is a extraordinary video and it is greatly appreciated! The content, might I add, you provide to the investing community is superb!

[takuforts]

Hi how do i find the current cash flow multiple? You say apples was 26.9? Thanks in advance!

[charleneterrell]

That's exactly where I'm going with it and do plan to compare value methods. I also know the business model is extremely important and must be in good shape. There is research to be done and I'm thinking about growth rates.

[frosherman]

I really love this video! such a great quality and a wonderful explanation!

[andrewmeyer]

This video is exactly why I follow this channel.

[chadfinchii]

I don’t understand, I’m completely lost at how you came up with 8% for 0-5yrs and 6% 5-10yrs. How do you find these percentages? I was thinking 8.00%+8=16% but wasn’t sure after that I don’t even understand where the 6% came from😭 I’m horrible at math but I’m trying

[TheDreamLife]

Hi. Love the Video! Can you please explain how you got the *20 multiplier for the Terminal Value? In the video you said that "apple's current cash flow multiple is 26.9" I am not sure where you found that 26.9% value?

[cmaur]

One question.... why do you use 11 instead of 10 when calculating the PV of the terminal value? Shouldn't that be based on the end of year 10? Great video and thank you very much for the excel link!