Calculate the intrinsic value of a share - Calculate Now
How does the calculation of intrinsic value help us when buying shares?
The intrinsic value is the true value of a share, minus all debts and obligations. It tells us how much money shareholders actually have in hand when they sell their shares. This is especially important to know considering that companies often carry heavy debt loads.
If you know the intrinsic value of a stock, you can buy the stock at the right price. For example, it is not advisable to buy a stock whose intrinsic value is lower than the current share price. Instead, one should only buy shares whose intrinsic value exceeds the current price. This is especially true when you consider that the dividend yield is often lower than the intrinsic value.
Benjamin Graham and the intrinsic value calculation
Value investing was first popularized by Benjamin Graham, the teacher and mentor to Warren Buffett, who also co-authored with David Dodd in 1934, one of the most important books in finance, Security Analysis. Warren Buffets most important book in finance, Security Analysis.
Benjamin Graham is considered to be the father of value investing, and is the mentor of modern-day value investors such as Warren Buffett. Graham is considered to be the father of value investing, and his two books, Security Analysis and the smart investor, defined his investing philosophy, particularly on what it means to be a value investor.
How to calculate the intrinsic value of a share?
The intrinsic value can be calculated in two ways: either by fundamental analysis or by technical analysis. Fundamental analysis calculates the intrinsic value of a stock based on its economic ratios. These include, for example, earnings per share (EPS), price/earnings ratio (P/E) and cash flow per share.
Technical analysis, on the other hand, takes into account the price development of a stock and tries to identify patterns and trends. Both methods have their advantages and disadvantages and should therefore be combined to get the best possible purchase price for a particular stock.
If you think a stock is undervalued, buy it at its intrinsic value and expect the stock's price to rise and you to make a profit. Many investors hold stocks until they reach their intrinsic value. Once the stock reaches its intrinsic value, they sell the stock and reinvest their money in other undervalued stocks.
What is the formula of the intrinsic value of a stock?
Intrinsic value is the true value of a stock, minus all debt and other factors. It is the amount you will receive if you sell the stock. Intrinsic value is important because it tells you whether a stock is undervalued or overvalued.
If you know the intrinsic value, you can decide whether to buy or sell the stock.
The following stock formula applies
Conclusion - The intrinsic value as a guide for buying or analyzing shares
The intrinsic value of a stock is the amount you would receive if you sold the stock at the current price. This value can be calculated using a number of factors, including the current price, dividend yield, and earnings per share. Intrinsic value is a major factor in deciding whether you should buy or sell a stock.
Intrinsic value is a good indication of a stock's value, but there are other factors to consider. For example, a stock may be undervalued because it is trading in a difficult market environment. In this case, it could be that the stock will soon rise once the market recovers.
A company's future prospects can also affect its intrinsic value. If a company is expected to grow strongly, this could mean that the stock will soon rise.
The intrinsic value is only one indication of the actual value of a stock. It is important to consider other factors as well before making a decision to buy or sell a stock.