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Intrinsic Value Formula:
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Intrinsic value is an estimate of a company's true worth based on its ability to generate cash flows in the future. Warren Buffett's approach focuses on owner earnings (a measure of free cash flow) discounted at an appropriate rate.
The calculator uses the simple capitalization formula:
Where:
Explanation: This formula capitalizes the owner earnings at the discount rate, representing what you would pay to earn those cash flows at your required return.
Details: Calculating intrinsic value helps investors determine whether a stock is undervalued or overvalued compared to its market price, following the value investing philosophy of Warren Buffett and Benjamin Graham.
Tips: Enter owner earnings (normalized free cash flow) in USD and your required discount rate as a decimal (e.g., 0.10 for 10%). Both values must be positive numbers.
Q1: What are owner earnings?
A: Owner earnings represent the company's normalized free cash flow available to shareholders, calculated as net income + depreciation - capital expenditures - working capital changes.
Q2: How to choose a discount rate?
A: The discount rate should reflect your required return, often based on the risk-free rate plus a risk premium (typically 8-15% for stocks).
Q3: When is this simple model appropriate?
A: Best for stable, mature companies with predictable cash flows. Growth companies may need multi-stage DCF models.
Q4: What are limitations of this approach?
A: Assumes constant earnings forever, doesn't account for growth or changing conditions. More complex models may be needed for accurate valuation.
Q5: How does this compare to market price?
A: If intrinsic value > market price, the stock may be undervalued. However, always consider margin of safety and qualitative factors.