Intrinsic Value
There is no single definitive definition for the business term ‘intrinsic value’. However, there are notable statements from a broad section of business authorities that, when considered collectively, provide a general understanding of intrinsic value. The best overall statement is:
Intrinsic value is an entity-specific price derived from an investor’s analysis and assumptions. The goal is to assign an objective monetary value to inherently subjective criteria. In contrast to fair market value, which relies on a voluminous batch of transaction data, different methods, formulas, factors, and assertions are analyzed to generate the most probable true worth of a business operation.
Intrinsic value can and frequently is greater than market value. This is what value investors seek. The goal is to buy the security for less than its intrinsic value and allow the market to recognize this aberrant delta in value and elevate the security’s market price past intrinsic value, whereupon the value investor sells the security. It follows the universal tenet of business: buy low, sell high.
The following graph depicts the relationship of intrinsic value to fair market value:
Note that the intrinsic value’s slope is gradual in comparison to the market price. The market price has frequent and volatile changes, whereas the intrinsic value line is steady. The top 2,000 reporting U.S. companies typically have upward-sloping intrinsic value lines. As an example, McDonald’s intrinsic value improves by about one penny per day per share. There are 713 million shares in the market; thus, McDonald’s intrinsic value increases by about $713,000 per day. Therefore, annually, intrinsic value improves by about $3 to $4 per share. McDonald’s current intrinsic value is around $213 in the third quarter of 2025. Its market price is over $300 per share. Given McDonald’s strong cash flow and business model, it is unlikely that the two lines (intrinsic and market value) will ever converge or cross over. Simply put, McDonald’s is a solid operation, one of the top 30 companies in the world. Companies like this will rarely have intrinsic value greater than market value; thus, opportunities to own are rare for value investors. Other examples include:
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- Coca-Cola
- Travelers Insurance
- Verizon
- JP Morgan Chase
All of the above companies are solid and have financial depth to withstand recessions and, in some cases, even depressions. As an example, Coca-Cola has been publicly traded for 106 years and has NEVER lost money in any fiscal year of operations, including during the Great Depression.
What this tells us is that no two companies are alike; thus, the intrinsic value calculations must be different for each company an investor investigates. This part of the website exists to teach value investors the proper methods to utilize when calculating intrinsic value. Many of the articles cover in-depth details about one or two elements/factors for the multitude of different formulas, algorithms, assumptions, tools, and methods a value investor exercises to calculate intrinsic value.
The goal is to educate investors as to the best way to analyze a company, given the company’s business model, the industry involved, and the respective dynamics. NO TWO COMPANIES ARE ALIKE, AND THUS, THE INTRINSIC VALUE CALCULATION MUST BE DISTINCTIVE TO THAT COMPANY. As an analyst, using simple cookie-cutter formulas to determine intrinsic value is acceptable so long as the analyst qualifies the level of confidence at less than 80%. At that level of confidence, it is only slightly better than speculation. Confidence levels must be greater than 92% to provide the necessary conviction to set the buy price for an investment.
Overall, there are four different approaches (a broad set of methods, parameters, formulas, etc.) to calculating intrinsic value. In some situations, a value investor will use two or possibly all four approaches and assign weighted values to each approach to derive a final determination of intrinsic value. The four approaches are:
- Earnings-Based – this approach was advocated by Benjamin Graham and David Dodd in their multiple editions of Security Analysis.
- Asset Approach – here, a company’s assets are adjusted to current fair market value and further reduced to cover all liabilities, resulting in a net asset valuation. Think of how modern residential real estate purchase utilizes a comparative market analysis report to set the fair price for a home.
- Market Value – similar companies can be priced based on recent activity for a similar operation. This type of approach is more appropriate for valuing companies that have a strong intangible asset portfolio.
- Cash Flows – this particular approach relies on strong assumptions of a going concern with very little risk of change with market share or operations, along with a strong history of consistency. Future cash flows are discounted using a risk factor, and a final valuation is determined by adding up the value of all future discounted flows. This particular approach is most commonly exercised by so-called experts and, in most cases, is improperly used; worse, the analyst uses liberal assumptions, and the discount rate is too weak to gain a high level of confidence in the result.
This section of Lessons, Tutorials, and Resources focuses on intrinsic value. It covers the various methods, tools, and algorithms for each of the above approaches. In addition, it provides guidance on how to make good and reasonable assumptions, how to properly read financial statements, and extrapolate results to determine history, growth rates, and changes in operations that impact growth, earnings, and cash flow.
It starts out with a set of lessons that cover the basic connection of intrinsic value to the balance sheet and how the approach transitions to earnings, then ultimately to asset valuation, and finally market values. Each successive lesson adds new information, thus always expanding the definition of intrinsic value. By the end of this series, the investor should be able to:
- Properly Evaluate the Business Model
- Incorporate Industry Standards
- Understand Risk Factors and Set Discount Rates
- Determine Best Approach to Calculating Intrinsic Value
- Calculate Intrinsic Value Range
- Set the Intrinsic Value Level of Confidence
The end goal is to help the investor realize that there is no definitive outcome that provides a 100% level of confidence. However, an intrinsic value price that has a strong level of confidence with accuracy will always bring a good return on one’s investment awareness. Act on Knowledge.
Intrinsic Value – Required Attributes
Intrinsic Value – Core Concept
Intrinsic Value – Balance Sheet Fundamentals
Intrinsic Value – Definition and Introduction
Intrinsic Value – Application of Discounted Cash Flows
