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What is Intrinsic Value?

Intrinsic Value is the present value of all future cash flows a business is expected to generate, discounted at an appropriate rate. The gap between intrinsic value and the current market price is the margin of safety -- the cushion that protects value investors against estimation errors and market volatility.

Cite this page

ValueMarkers (2026). "Intrinsic Value Definition and Formula." Retrieved from

Formula

Intrinsic Value = Sum of (Future Cash Flow / (1 + Discount Rate)^n)

Why Intrinsic Value Matters

Intrinsic value is the cornerstone of value investing. Benjamin Graham and Warren Buffett built their entire investment philosophies around the idea that the market periodically misprices businesses -- and that patient investors who can estimate intrinsic value accurately can exploit those gaps. The margin of safety -- buying well below intrinsic value -- is the primary risk control tool in a value investor's toolkit.

Estimating intrinsic value is as much art as science. Small changes in growth rate assumptions or the discount rate can swing the result dramatically. That is precisely why Buffett insists on buying businesses with strong competitive moats: a wider moat narrows the range of plausible intrinsic value estimates, making the margin of safety calculation more reliable.

Calculate Intrinsic Value

Use our free DCF Calculator to estimate a stock's intrinsic value from its projected cash flows and discount rate.

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Frequently Asked Questions

What is intrinsic value?+
Intrinsic value is the true, fundamental worth of an asset based on its future earning power, not its current market price. For a stock, it equals the present value of all future cash flows the business can generate, discounted back at a rate that reflects the risk involved.
How do you calculate intrinsic value?+
The most common method is a Discounted Cash Flow (DCF) analysis: project free cash flows for 5-10 years, estimate a terminal value for cash flows beyond the forecast period, then discount everything back to today at an appropriate rate (usually WACC or cost of equity). The sum is the intrinsic value.
What is the difference between intrinsic value and market price?+
Market price is what investors are willing to pay for a share today, driven by sentiment, supply, and demand. Intrinsic value is what the business is fundamentally worth based on its cash flows. When market price is well below intrinsic value, value investors see a margin of safety and a potential buying opportunity.
What discount rate should I use for intrinsic value?+
Most practitioners use the Weighted Average Cost of Capital (WACC) when valuing a whole business, or the cost of equity when valuing equity directly. Conservative value investors sometimes use a flat hurdle rate of 10-15% to account for uncertainty. A higher discount rate produces a lower intrinsic value, so the choice has a significant impact on results.

Related Terms

Discount Rate

Rate used to convert future cash flows to present value

Terminal Value

Value of cash flows beyond the forecast period

Free Cash Flow

Operating cash flow minus capital expenditures

Net Present Value

Discounted value of future cash flows

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