What is a company really worth? Not always what investors are paying for it on the stock market. The so-called intrinsic value reveals what truly lies behind the share price – whether you're looking at public stocks, private companies, or M&A targets.
It’s based not on market sentiment or trends, but on hard numbers and fundamentals. So if you want to know whether a stock is currently undervalued or overpriced, intrinsic value is exactly what you need to look at.
What Is Intrinsic Value and How To Calculate It?
Intrinsic value (also called "fair value") is an estimate of what a company is really worth. It doesn’t follow market noise but instead looks at long-term indicators like earnings potential, assets, and future prospects.
There are several methods to calculate intrinsic value. The right one depends on what kind of company you’re analyzing and how much data you have. Here are three common approaches.
Income Approach
The income approach is a valuation method where you estimate how much profit a company will make in the coming years and then convert that future profit into today’s value. The more stable and predictable the profits, the better this method works.
Discounted Cash Flow (DCF)
DCF is a special version of the income approach. Instead of just looking at profits, it focuses on cash flows. That means the real money the company expects to receive. You use a discount rate to bring these future cash flows back to their value today.
The result is a number that shows the present value of future cash flows. This is your estimate of the company’s intrinsic value. DCF is a very common method and is often seen as the standard in the industry.
Multiples Method (Market Comparison)
This method compares the company to similar businesses. For example, you can look at how much revenue or profit other companies make and what their market prices are. Then you use multiples like the P/E ratio (price to earnings) or revenue multiple to estimate the value.
This method is simple but not always exact. It works best when the companies you are comparing are truly similar.
How to Interpret Intrinsic Value
Once you’ve estimated the intrinsic value, you can compare it to the current market price.
- If the market price is below the intrinsic value, the stock might be undervalued. You may be paying less than the company is actually worth.
- If the market price is far above the intrinsic value, the stock could be overvalued. You might be paying too much.
Of course, the result depends on your assumptions, so it’s important to question them. Still, intrinsic value gives you a solid starting point for making informed investment decisions.
Reasons Why You Should Know The Intrinsic Value
In finance, it’s not enough to just watch stock prices. You need to understand what’s behind those prices and whether they reflect the company’s true worth.
Knowing how to work with intrinsic value gives you several advantages:
- You can judge whether a stock is cheap or expensive.
- You can compare companies more meaningfully.
- You can base your arguments on facts in interviews or investment discussions, rather than just opinions.
This skill is especially important in areas like investment banking, equity research, or private equity.
Common Interview Questions About Intrinsic Value
We’ve picked out three questions that often come up in interviews, with short and simple answers to help you feel more confident.
How can you estimate the intrinsic value of a company?
There are multiple ways. You can use projected future cash flows (like in a DCF model) or compare the company to others using valuation multiples. The best method depends on the type of company and the data available.
What does it mean if the intrinsic value is higher than the current market price?
It could mean the company is undervalued by the market. That may suggest a buying opportunity, assuming your assumptions are realistic.
What is the difference between intrinsic value and market price?
The market price is what investors are currently willing to pay. It is driven by supply and demand. The intrinsic value, on the other hand, is based on financial analysis and shows what the company should be worth based on its fundamentals.
👉 Find further questions you might encounter in a finance interview in our Case Library.