{"id":1915,"date":"2018-05-15T10:00:20","date_gmt":"2018-05-15T04:30:20","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/?p=1915"},"modified":"2026-05-14T14:35:52","modified_gmt":"2026-05-14T09:05:52","slug":"intrinsic-value-of-a-stock","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/intrinsic-value-of-a-stock\/","title":{"rendered":"Intrinsic Value of a Stock: How to Find the Right Price Before Investing"},"content":{"rendered":"

What is the Intrinsic Value of a Stock?<\/h3>\n

Understanding the intrinsic value of a stock is one of the most important aspects of intelligent investing. A fundamentally strong company may still become a poor investment if purchased at an excessive valuation. By estimating the intrinsic value of a stock, investors can determine whether a stock is undervalued, fairly priced, or overvalued before making an investment decision.<\/p>\n

Before investing in a stock, you need to know if it\u2019s available at the right price: a price that reflects its Intrinsic Value. Intrinsic value essentially means a value based on things the company has that generate value (read profits, cash flows, or replacement cost of all its value-generating assets)<\/em> and not on external things. This is quite difficult to assess very accurately; there can only be estimates. There are different methods to estimate Intrinsic Value that work in different situations. Since we are assessing a listed company, i.e. an established company and not a start-up, the most relevant method is the Discounted Cash Flow, or simply the DCF method.<\/p>\n

If you were to buy the whole company, what price should you rationally pay for it?<\/span><\/h2>\n

You would look at the cash it would be able to give you every year and add it up. But you can\u2019t simply add up cash generated in different years, because of Rs. 100 today is not the same as Rs. 100 one, two, or three years later. So, you have to reduce the value of the cash generated in the future years by a factor, to make it equivalent to its value today or its Present Value.<\/p>\n

This is the money you earn while you own the company. And suppose you decide to sell it after a fairly long time, you would get some money for it based on what is called the Terminal Value. All this depends on the company\u2019s ability to generate cash flows or simply profits, and hence, its intrinsic value too.<\/p>\n

Now, as a Retail Investor, you own some shares in a company, but you can apply the same principle as above to arrive at the Fair Value of the stock. It is a bit different from its Intrinsic Value, but we can approach it in a rational manner. We, at MoneyWorks4me, prefer to call this the MRP or Maximum Retail Price of a stock<\/strong>.<\/p>\n

The Fair Value of a stock relates to the returns that investors expect to receive from holding the stock. So, to arrive at the right value of a stock, you need to look at the future returns you will get by investing in a stock, and then discount them to arrive at its Present Value using an appropriate rate of discount.<\/p>\n

\u00a0<\/strong>Suppose you have invested in a stock, keeping a long-term holding period in mind. You earn income or returns from this investment in two ways, i.e. (a)\u00a0Future Dividends <\/strong>(which you will receive every year) and (b)<\/strong>\u00a0Future Selling Price.<\/strong><\/p>\n

Hence, the Fair Value of a stock, i.e. the MRP, can be calculated as<\/span><\/p>\n

\"MRP<\/a><\/p>\n