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Intrinsic value

Key Takeaways

  1. Intrinsic value and market value, both terms estimate the company’s performance and value.
  2. The intrinsic value measures a company’s real value without considering its market value.
  3. The market value is nothing but the current price of the company’s stock.
  4. Investors use intrinsic value to analyze the company’s performance.

Intrinsic value is the hypothetical value of a security which it should command if all the information about it is available to the markets. It is the true worth of the investment in that security or asset.

Intrinsic value meaning

Intrinsic value is the computed value of a currency, company’s stock, company and product through fundamental analysis. It generally gives the real value of an asset independent of its current value in the market. While computing the intrinsic value analysts consider both factors qualitative and quantitative. The qualitative factors include company’s performance, productivity, business management and market factors. The quantitative factors include financial statement and accounting data, through which a company’s intrinsic value is compared with its current value to assess whether company’ shares are overvalued or undervalued.

The driving force behind active management in investment is intrinsic value and how to identify it. It is given that not all information that could have an impact on security is easily available to the public. The fund managers strive to determine the assets’ intrinsic value and buy or sell based on how it measures up to the current market price.

Intrinsic value vs market value

Intrinsic value and market value, both terms estimate the company’s performance and value. The intrinsic value measures a company’s real value without considering its market value. The market value is nothing but the current price of the company’s stock. Investors use intrinsic value to analyze the company’s performance. The rationale behind this is to invest in a company which has greater value than value which is determined by the current market. If the current market value of the company is lower than the company’s intrinsic value, that means the company’s stocks are undervalued. If there is more demand for investment in the company, then it increases the company’s market value. If the company’s current value is higher than its intrinsic value, this means stocks of that particular company are overvalued.

Methods of calculating Intrinsic Value

1.Discounted cash flow approach: It is the most accurate method for determining a stock’s intrinsic value. You must carry out a DCF analysis in three steps.

  • Estimate all of a company’s future cash flows.
  • Calculate the present value of each of these future cash flows.
  • Sum up the present values to obtain the intrinsic value of the stock.

2. Price-to-earnings (P/E) ratio approach:– It is a quick and simple approach to calculating a stock’s intrinsic value. The formula for this strategy using a stock’s P/E ratio is as follows:
Intrinsic value = Earnings per share (EPS) x (1 + r) x P/E ratio

3. Asset-based valuation approach:– It is the simplest method for determining a stock’s intrinsic value. The formula for this approach is as follows:
Intrinsic value = (Sum of a company’s assets, both tangible and intangible) – (Sum of a company’s liabilities)