How to Calculate the Intrinsic Value of a Stock

The single most important question in investing is also the one most people skip: what is this business actually worth? The market quotes a price every second, but price and value are not the same thing. Price is what you pay. Value is what you get. Learning how to calculate intrinsic value is what separates investing from speculation.

What is intrinsic value?

Intrinsic value is an estimate of what a business is genuinely worth based on the cash it can generate for its owners over time, discounted back to today. It ignores hype and short-term price swings. Because it depends on assumptions about the future, intrinsic value is always a range, not a single perfect number — which is why disciplined investors demand a margin of safety.

Method 1 — Discounted Cash Flow (the classic)

Discounted cash flow (DCF) estimates all the future free cash a company will produce, then discounts it back to present value:

• Start with current free cash flow (or owner earnings).
• Estimate a conservative growth rate for the next 10 years, based on actual history.
• Apply a discount rate (often 15% for individual investors).
• Add a terminal value for the years beyond your forecast.
• Sum everything and divide by shares outstanding.

The weakness of DCF is sensitivity: small changes in growth or discount assumptions move the answer a lot — which is why you should never rely on a single method.

Method 2 — 10-CAP (the owner's yield)

The 10-CAP asks: if I bought the whole business, what cash return would I earn? You take owner earnings and divide by a 10% capitalization rate. It treats the company like a rental property — you want at least a 10% yield on the cash the business throws off.

Method 3 — Payback Time

Payback Time flips the lens to risk: how many years until the company's earnings pay back my purchase price, assuming it keeps growing? If a great business pays you back in 8 years or fewer, the price is reasonable; if it takes 20, you are paying too much for the future.

Why use three methods instead of one

No single method is reliable on its own. The discipline professionals use is to cross-check: if DCF, 10-CAP, and Payback Time all point to a similar value, your estimate is robust. If they wildly disagree, dig deeper before risking a dollar.

Always demand a margin of safety

Once you have a fair value estimate, don’t buy at that price — buy meaningfully below it. A 30–50% margin of safety means that even if your assumptions are too rosy, you are unlikely to overpay. Moatly cross-checks all three valuation methods automatically and rolls them into one fair value price with a margin-of-safety score.