{"id":22704,"date":"2018-05-15T00:00:00","date_gmt":"2018-05-14T18:30:00","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/before-investing-find-the-right-price-of-each-stock-its-mrp\/"},"modified":"2018-05-15T00:00:00","modified_gmt":"2018-05-14T18:30:00","slug":"before-investing-find-the-right-price-of-each-stock-its-mrp","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/before-investing-find-the-right-price-of-each-stock-its-mrp\/","title":{"rendered":"What is the Right Price of a Stock? How do you Asses its Intrinsic Value?"},"content":{"rendered":"

Before investing in any stock, every rational investor must answer one question:<\/span>
\u00a0\u201cIs this stock available at the right price?\u201d<\/strong><\/span><\/p>\n

That \u201cright price\u201d is what professional investors call the\u00a0Intrinsic Value<\/strong> \u2014 the true worth of a company based on its ability to generate future cash flows, not the hype or sentiment in the market.<\/span><\/p>\n

What Is Intrinsic Value?<\/strong><\/span><\/h2>\n

The\u00a0intrinsic value<\/i> of a stock is an estimate of what the company is really worth \u2014 derived from its fundamentals such as profits, free cash flows, and the economic value of its assets. It excludes market noise or short-term speculation.<\/span><\/p>\n

Because the future is uncertain, intrinsic value cannot be calculated with perfect precision; it can only be\u00a0estimated<\/i> using reasonable assumptions about growth, profitability, and risk.<\/span><\/p>\n

There are several ways to estimate intrinsic value, such as:<\/span><\/p>\n

    \n
  • Discounted Cash Flow (DCF) method<\/strong><\/span>
    \u00a0<\/li>\n
  • Dividend Discount Model (DDM)<\/strong><\/span>
    \u00a0<\/li>\n
  • Asset-based valuation<\/strong><\/span><\/li>\n<\/ul>\n

    For established, publicly listed companies, the\u00a0Discounted Cash Flow (DCF)<\/strong> method is considered the most relevant and widely used.<\/span><\/p>\n

    The Logic Behind the DCF Method<\/strong><\/span><\/h2>\n

    If you were to buy the entire company outright, the price you should pay depends on the total\u00a0cash flows it will generate for you in the future<\/strong>.<\/span><\/p>\n

    However, Rs 100 received today is more valuable than Rs 100 received three years later.<\/span><\/p>\n

    Therefore, each future cash flow must be\u00a0discounted<\/i> back to its\u00a0present value<\/i> using an appropriate rate of return \u2014 typically the\u00a0cost of equity<\/strong>.<\/span><\/p>\n

    The sum of all these\u00a0discounted future cash flows<\/i> represents the company\u2019s\u00a0Intrinsic Value<\/strong>.<\/span><\/p>\n

    \"\"<\/figure>\n

    In simpler terms:<\/span><\/p>\n

    Intrinsic Value = Present Value of All Future Cash Flows + Present Value of Terminal Value<\/strong><\/span><\/p>\n

    Applying This to a Stock You Own<\/strong><\/span><\/h2>\n

    As a retail investor, you don\u2019t buy the entire company \u2014 you buy a portion of it through shares. But the same principle applies.<\/span><\/p>\n

    At\u00a0MoneyWorks4Me<\/strong>, we call the fair value or intrinsic value of a stock its\u00a0MRP (Maximum Retail Price)<\/strong> \u2014 the highest price you should pay if you want to earn your minimum expected return.<\/span><\/p>\n

    Your returns from owning a stock come from two components:<\/span><\/p>\n

      \n
    1. Dividends<\/strong> \u2014 the annual cash income received from the company.<\/span>\u00a0<\/li>\n
    2. Future Selling Price<\/strong> \u2014 the price at which you expect to sell your shares later.<\/span><\/li>\n<\/ol>\n

      Hence, the\u00a0Fair Value (or MRP)<\/strong> of a stock can be expressed as:<\/span><\/p>\n

      Fair Value = Present Value of Future Dividends + Present Value of Future Selling Price<\/strong><\/span><\/p>\n

      Estimating the Future Selling Price<\/strong><\/span><\/h3>\n

      The\u00a0future selling price<\/i> depends on:<\/span><\/p>\n

        \n
      • Expected Earnings Per Share (EPS)<\/strong> of the company in, say, five years.<\/span>\u00a0<\/li>\n
      • Expected Price-to-Earnings (P\/E) multiple<\/strong> that the market will assign then.<\/span><\/li>\n<\/ul>\n

        Analysts estimate future EPS based on:<\/span><\/p>\n

          \n
        • Sales growth trends<\/span><\/li>\n
        • Profit margins and efficiency (e.g., Return on Invested Capital, or ROIC)<\/span><\/li>\n
        • Competitive position and industry outlook<\/span><\/li>\n<\/ul>\n

          The expected P\/E multiple can be estimated using:<\/span><\/p>\n

            \n
          • Historical market averages<\/span><\/li>\n
          • Expected growth rate of earnings<\/span><\/li>\n
          • Broader economic conditions<\/span><\/li>\n<\/ul>\n

            This combination gives you an estimate of what the stock might trade for in the future.<\/span><\/p>\n

            Estimating the Present Value of Dividends<\/strong><\/span><\/h3>\n

            Dividends can be projected using the company\u2019s historical payout and growth rate.<\/span><\/p>\n

            For each expected annual dividend, you discount it back to the present using your desired rate of return (the\u00a0Cost of Equity<\/strong>).<\/span><\/p>\n

            At\u00a0MoneyWorks4Me<\/strong>, we treat the\u00a0Cost of Equity<\/i> as the\u00a0minimum acceptable rate of return<\/i> for each company \u2014 typically 10\u201315% depending on risk.<\/span><\/p>\n

            Holding Period and Expected Return<\/strong><\/span><\/h3>\n

            We usually assume a\u00a05-year holding period<\/strong> when estimating the MRP or fair value of a stock.<\/span><\/p>\n

            This period is long enough to let the business fundamentals play out, and short enough to model with reasonable accuracy.<\/span><\/p>\n

            Thus:<\/span><\/p>\n

            MRP = Price that ensures your expected return (Cost of Equity) over 5 years<\/strong><\/span><\/p>\n

            The Margin of Safety: Protecting Against Uncertainty<\/strong><\/span><\/h3>\n

            Even the most rigorous intrinsic value calculation involves assumptions \u2014 about growth, profitability, or valuation multiples \u2014 that can go wrong.<\/span><\/p>\n

            Moreover, markets can behave irrationally in the short term.<\/span><\/p>\n

            That\u2019s why intelligent investors always buy stocks at a\u00a0discount to their MRP<\/strong>, known as the\u00a0Margin of Safety<\/strong>.<\/span><\/p>\n

            A higher margin of safety protects you against:<\/span><\/p>\n

              \n
            • Forecasting errors<\/span><\/li>\n
            • Market volatility<\/span><\/li>\n
            • Unforeseen events (regulatory changes, recessions, etc.)<\/span><\/li>\n<\/ul>\n

              The principle is simple but powerful:<\/span><\/p>\n

              Always buy below intrinsic value \u2014 the greater the uncertainty, the larger your margin of safety should be.<\/strong><\/span><\/p>\n

              Key Takeaways<\/strong><\/span><\/h3>\n
                \n
              • Intrinsic Value<\/strong> represents a company\u2019s true worth based on its future cash-generating ability.<\/span><\/li>\n
              • The\u00a0DCF method<\/strong> is the most reliable way to estimate intrinsic value for established companies.<\/span><\/li>\n
              • Fair Value (MRP)<\/strong> of a stock = Present Value of Future Dividends + Future Selling Price discounted to today.<\/span><\/li>\n
              • Cost of Equity<\/strong> is used as the discount rate \u2014 your minimum expected annual return.<\/span><\/li>\n
              • Always invest\u00a0below<\/strong> intrinsic value to create a\u00a0Margin of Safety<\/strong>.<\/span><\/li>\n<\/ul>\n

                In Summary<\/strong><\/span><\/h2>\n

                The\u00a0right price<\/i> of a stock is not what the market quotes today but the price that ensures you earn a satisfactory long-term return based on the company\u2019s fundamentals.<\/span><\/p>\n

                As Warren Buffett said:<\/span><\/p>\n

                \u201cPrice is what you pay. Value is what you get.\u201d<\/span><\/p>\n

                At\u00a0MoneyWorks4Me<\/strong>, we quantify that\u00a0value<\/i> through our MRP-based valuation framework \u2014 helping investors know the fair price of every stock and make decisions backed by data, not emotion.<\/span><\/p>\n

                \"\"<\/figure>\n","protected":false},"excerpt":{"rendered":"

                Before investing in a stock, you need to know if it\u2019s available at the right price: a price that reflects its Intrinsic Value. Read more!<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_is2025_no_summary":false,"footnotes":""},"categories":[1144,1151],"tags":[],"class_list":["post-22704","post","type-post","status-publish","format-standard","hentry","category-sensible-investing","category-stock-investment"],"_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22704","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=22704"}],"version-history":[{"count":2,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22704\/revisions"}],"predecessor-version":[{"id":23202,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/22704\/revisions\/23202"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=22704"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=22704"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=22704"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}