Intrinsic Value

Intermediate

Intrinsic value is the estimated true worth of an asset based on its fundamental characteristics, such as the cash it is expected to generate, rather than its current market price.

Market prices can be swayed by emotions, trends and short-term news. Intrinsic value tries to look past these to what an asset is really worth based on its underlying economics.

For a company, intrinsic value is often estimated using a discounted cash flow analysis: forecasting the cash the business will generate in future and discounting it to today. Other methods use dividends, earnings or assets.

For example, an analyst might estimate that a company's future cash flows are worth 45 per share today. If the shares trade at 35, the analyst would see them as undervalued and potentially a good investment. If they trade at 60, they may look overvalued.

Value investors focus on buying assets below their intrinsic value, often leaving a margin of safety to allow for errors in their estimates.

Intrinsic value is an estimate, not a fact. It depends on assumptions about future growth, profits and risk, so different investors may reach different conclusions. The term also has a separate meaning for options, where it refers to the amount by which an option is in the money.

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