Intrinsic Value Calculator
Estimate what a share could be worth per share with a two-stage discounted cash flow, and compare it with the Graham number and today's price. See how much the answer moves when your assumptions change. Runs in your browser; nothing is uploaded.
Cash flow is projected to grow for the number of years you choose, then to grow more slowly for ever, and every year is discounted back to today. Free cash flow per share is the usual starting point, and earnings per share is a rough stand-in.
A rule of thumb from Benjamin Graham: the square root of 22.5 times earnings per share times book value per share.
A worked example
Say a company generates ₹25 of free cash flow per share, you expect it to grow 12% a year for 10 years and 5% a year after that, and you discount at 12%. Because the growth equals the discount rate, each of the first 10 years is worth ₹25 in today's money, so those years are worth ₹250. After year 10 the cash flow is 25 × 1.12^10 = ₹77.65, and the years after that are worth 77.65 × 1.05 ÷ (0.12 − 0.05) = ₹1,164.69 at that point, which is ₹375.00 today. The total is ₹625.00. Against a price of ₹500 that is 25% above the price and a margin of safety of 20%. The Graham number, the square root of 22.5 × 25 × 200, is ₹335.41, which reads the other way and shows how differently two methods can see the same share.
How much the answer moves
The value per share if the discount rate and the growth after the first years were slightly different from your inputs. Small changes in these two numbers move the result a lot.
Understanding the calculation
- Discounted cash flow
- Each year's cash flow per share is grown at your first rate for the years you chose, then divided by (1 + discount rate) raised to the number of years, since money later is worth less than money today. The result is the sum of those present values.
- Value after the first years
- After the last projected year the cash flow is assumed to grow at the slower rate for ever. That stream is valued as the next year's cash flow divided by (discount rate minus that growth), then discounted back. The discount rate must be higher than the growth rate for this to work.
- Margin of safety
- The gap between the estimated value and the price, as a share of the value. A positive figure means the price is below your estimate, and it only means anything if your estimate is sound.
- Graham number
- The square root of 22.5 × EPS × book value per share. The 22.5 comes from Graham's guideline of a P/E no higher than 15 and a price to book no higher than 1.5. It needs positive earnings and book value, and it suits asset-heavy, steady businesses better than fast-growing ones.
Common questions
What is intrinsic value?
It is an estimate of what a business is worth based on the cash it can produce, as opposed to the price the market currently puts on it. Different people reach different figures because they assume different growth and risk.
How does this discounted cash flow work?
It grows the starting cash flow per share at your first growth rate for the number of years you choose, then assumes a slower growth rate for ever after that. Every year's cash flow is divided by (1 + discount rate) raised to the number of years, and the present values are added together.
Why must the discount rate be higher than the later growth rate?
The value after the first years is the next cash flow divided by the difference between the two rates. If the growth rate were equal to or higher than the discount rate, that value would be infinite or negative, which makes no sense, so the calculator asks you to change the inputs.
What discount rate and growth should I use?
There is no right answer. A common approach is a discount rate that reflects the return you would want for the risk, higher for riskier businesses, and a growth rate after the first years that is no higher than the long-run growth of the economy. Because the result is so sensitive to both, look at the table of alternatives and not a single figure.
What is the Graham number?
It is the square root of 22.5 × earnings per share × book value per share. The 22.5 comes from Benjamin Graham's guideline of a P/E no higher than 15 and a price to book no higher than 1.5. It needs positive earnings and book value, and it suits steady, asset-heavy businesses better than fast-growing ones.
What is a margin of safety?
It is the gap between your estimated value and the price, as a share of the value. A positive margin means the price is below your estimate, which leaves room for your estimate to be wrong. It only means something if the estimate is sound.
Can I use earnings per share instead of free cash flow?
You can, but earnings and cash flow differ when a company spends heavily on equipment or has large non-cash items. Free cash flow per share is the better input when you can find it.