Intrinsic Value: What It Is and How to Calculate It
Nizar Assanie
Intrinsic value is an estimate of what a business is worth based on the cash it will produce in the future, not on what the market is paying today. You calculate intrinsic value by forecasting a company's free cash flows and discounting them back to the present at a rate that reflects their risk.
Price is what a stock costs right now. Intrinsic value is what the stock should be worth if your cash-flow forecast is right. When price sits well below intrinsic value, a stock may be undervalued; when it sits well above, the market is assuming more growth than the numbers support.
This guide is for investors who pick their own stocks. You will learn the main methods, follow a complete discounted cash flow (DCF) calculation for Procter & Gamble from its fiscal 2026 annual report, and turn the answer into a range you can act on.
Key takeaways
Intrinsic value is the present value of the cash a business can return to its owners over its remaining life, discounted at a rate that reflects risk.
Our base-case DCF puts Procter & Gamble's intrinsic value at $113.30 per share, against a closing price of $162.06 on November 3, 2026.
Reasonable inputs move that estimate from $85.64 to $161.01 per share, so intrinsic value should be treated as a range, not a single number.
In our base case, the terminal value, everything beyond year 10, makes up 57.8% of the total, which is why long-run assumptions matter more than next year's forecast.
The discount rate moves with markets: Aswath Damodaran's implied equity risk premium for the S&P 500 ranged from 4.23% to 6.43% at year ends from 2008 to 2025.
What is intrinsic value?
Intrinsic value is the value of an asset based on its own cash flows, growth and risk, independent of its current market price. For a stock, it is the present value of all the cash the company can pay its shareholders over its life.
Warren Buffett set out the most quoted definition in Berkshire Hathaway's owner's manual:
"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life."
— Warren E. Buffett, Chairman, Berkshire Hathaway, An Owner's Manual (1996)
Three inputs drive every intrinsic value estimate:
Cash flows. Usually free cash flow, the cash left after a company pays its operating costs and capital spending.
Growth. How fast those cash flows rise, first over a forecast period and then forever after.
Risk. Captured in the discount rate. Riskier cash flows are discounted at a higher rate, so they are worth less today.
Free cash flow is operating cash flow minus capital expenditures, both taken from the cash flow statement in a company's 10-K annual report.
What is intrinsic value vs market value?
Market value is the price investors pay today; intrinsic value is an estimate of what the business is worth. The two can differ for years. Benjamin Graham, the father of value investing, built his approach on buying when the market price sits well below a conservative estimate of value.
What is the intrinsic value of an option?
For options, intrinsic value has a narrower meaning: the amount an option is already "in the money." A call option's intrinsic value is the stock price minus the strike price, or zero if that is negative. Illustrative example: with Procter & Gamble at $162.06, a $150 call has an intrinsic value of $12.06 and a $170 call has none.
How do you calculate intrinsic value?
The standard way to calculate intrinsic value is a discounted cash flow (DCF) model. You forecast free cash flow for a set number of years, estimate a terminal value for the years after that, and discount everything to today.
The formula is:
Intrinsic value = FCF1÷(1+r)1 + FCF2÷(1+r)2 + … + FCFn÷(1+r)n + Terminal value÷(1+r)n
FCF is free cash flow, r is the discount rate and n is the number of forecast years. The terminal value is usually FCFn+1 ÷ (r − g), where g is a long-run growth rate below the economy's growth.
How do you choose a discount rate?
A common choice is the cost of equity from the capital asset pricing model (CAPM): risk-free rate + beta × equity risk premium. Beta measures how much a stock moves with the market. The equity risk premium is the extra return investors demand for owning stocks instead of Treasury bonds.
Use a discount rate that matches the cash flow. Aswath Damodaran, professor of finance at NYU Stern, calls this the discounting consistency principle: cash flows after debt payments are discounted at the cost of equity, and cash flows before debt at the cost of capital.
Discounting is compounding in reverse. If $100 grows to $108.38 in a year at 8.38%, then $108.38 a year from now is worth $100 today. Our compound interest calculator shows the same maths forward.
How do you calculate the intrinsic value of a real stock?
You calculate the intrinsic value of a real stock by taking its reported free cash flow, choosing growth and discount rates you can defend, and discounting. Here is a full DCF for Procter & Gamble (PG), using its fiscal 2026 10-K for the year ended June 30, 2026.
- Find free cash flow. Operating cash flow $19,556 million − capital expenditures $4,409 million = $15,147 million.
- Put it on a per-share basis. $15,147 million ÷ 2,422.5 million diluted shares = $6.25 per share ($6.2526 unrounded).
- Set the discount rate. 10-year Treasury yield 4.91% + beta 0.82 × equity risk premium 4.23% = 4.91% + 3.47% = 8.38%. Beta 0.82 is Damodaran's January 2026 average for US household products companies.
- Set growth. P&G's free cash flow grew 2.8% a year from fiscal 2022 to 2026 and revenue grew 3.3% in fiscal 2026. We assume 3% a year for 10 years, then 2.5% forever. These are assumptions, not facts.
- Discount 10 years of cash flow. Year 1 free cash flow is $6.44, worth $5.94 today; year 10 is $8.40, worth $3.76. The ten present values add up to $47.76.
- Add the terminal value. Year 11 cash flow $8.61 ÷ (8.38% − 2.5%) = $146.52 at year 10, worth $65.53 today.
- Add them up. $47.76 + $65.53 = $113.30 per share.
- Compare with the price. P&G closed at $162.06 on November 3, 2026, 43% above our base-case value.
Free cash flow here is after interest payments, so it belongs to shareholders, and we discount it at the cost of equity. That keeps the calculation consistent and means debt is already accounted for.
Procter & Gamble free cash flow, fiscal 2021 to 2026 ($ millions)
The chart shows why we did not simply extrapolate the best year. Free cash flow swung between $13.6 billion and $16.5 billion over six years, with no steady trend.
How much does intrinsic value change with your assumptions?
Intrinsic value changes a lot with small changes in assumptions, which is the most important thing to understand about it. We reran the Procter & Gamble DCF with different discount rates and long-run growth rates, keeping everything else the same.
| Discount rate | Long-run growth 2.0% | Long-run growth 2.5% | Long-run growth 3.0% |
|---|---|---|---|
| 7.0% | $138.15 | $148.31 | $161.01 |
| 7.5% | $125.41 | $133.38 | $143.12 |
| 8.0% | $114.79 | $121.16 | $128.80 |
| 8.38% (base) | $107.86 | $113.30 | $119.74 |
| 9.0% | $98.12 | $102.38 | $107.34 |
| 10.0% | $85.64 | $88.61 | $92.00 |
A 3-point change in the discount rate, from 7% to 10%, nearly halves the estimate. Changing growth in the first 10 years matters less: 2% gives $104.91 and 5% gives $132.18.
What growth is the market pricing in?
A reverse DCF answers a different question: what growth does today's price assume? Holding the 8.38% discount rate and 2.5% long-run growth, P&G's $162.06 price requires free cash flow to grow about 7.64% a year for 10 years. That is well above the 2.8% a year it achieved from fiscal 2022 to 2026.
A reverse DCF is often more useful than a forward one, because you judge one number, the implied growth, against the company's own history. Our guide on how to find undervalued stocks runs the same test on Microsoft.
Why does the discount rate change over time?
The discount rate changes because both of its parts move with markets: Treasury yields and the equity risk premium. When either rises, every company's intrinsic value falls, even if its cash flows do not change.
Implied equity risk premium for the S&P 500 at each year end, 2008 to 2025
Damodaran estimates the equity risk premium the S&P 500 implies at each year end. It peaked at 6.43% at the end of 2008 and stood at 4.23% at the end of 2025, near the low end of the past 18 years.
The risk-free rate moved too. The 10-year Treasury yield was 4.18% on December 31, 2025 and 4.91% on November 2, 2026, according to FRED. Holding beta and the risk premium fixed, that 0.73-point rise alone lowers P&G's base-case value.
Don't mix a discount rate from one date with a price from another. If you use today's price, use today's Treasury yield. Buffett notes that intrinsic value "must be changed if interest rates move."
How does DCF compare with other ways to estimate intrinsic value?
DCF is the most complete way to estimate intrinsic value, but it is not the only one, and the methods can disagree sharply. We applied four methods to Procter & Gamble with the same fiscal 2026 data.
Procter & Gamble intrinsic value by method vs market price (per share)
| Method | What it uses | Best for | Weak spot |
|---|---|---|---|
| Discounted cash flow (DCF) | Free cash flow, growth, discount rate | Companies with steady, positive free cash flow | Highly sensitive to discount rate and terminal growth |
| Reverse DCF | Current price, discount rate | Testing whether the market's growth assumption is realistic | Gives implied growth, not a value |
| Dividend discount model (DDM) | Dividend per share, growth, cost of equity | Mature companies that pay out most of their cash | Ignores buybacks; P&G spent $5,028 million on them in fiscal 2026 |
| Graham number | √(22.5 × EPS × book value per share) | Asset-heavy, low-growth companies | Undervalues brands and other assets not on the balance sheet |
| Relative valuation (P/E, EV/EBITDA) | Prices of similar companies | Quick screening against peers | Measures price, not value; a whole sector can be expensive |
The dividend discount model gives $81.56: P&G's fiscal 2026 dividend of $4.26 per share, grown 3%, divided by 8.38% minus 3%. The Graham number gives $58.87, from diluted EPS of $6.62 and book value of $23.27 per share.
The spread is the lesson. A brand-driven company such as P&G carries little of its value on the balance sheet, so asset-based methods come out low. Use the method that fits how the business makes money.
What does a good intrinsic value result look like?
A good intrinsic value result is a range, built from defensible inputs, with the current price compared against both ends. Use this decision guide once you have a low, base and high estimate.
| Where the price sits | What it suggests | What to do next |
|---|---|---|
| Below your low case | Potentially undervalued, even on cautious inputs | Check why the market disagrees; look for a value trap |
| Between low and base case | Modestly undervalued | Require a margin of safety before acting |
| Between base and high case | Roughly fairly valued | Usually no edge; wait or look elsewhere |
| Above your high case | Price assumes more than your best case | Run a reverse DCF; avoid unless you see growth others don't |
On these inputs, Procter & Gamble at $162.06 sits at the very top of our range, level with the $161.01 high case. That does not make it a sell. It means the price already assumes low discount rates and strong long-run growth.
Which intrinsic value approach is best for you?
The best intrinsic value approach depends on the kind of company you own and how long you plan to hold it.
Best for long-term value investors
A full DCF with a sensitivity table, rerun after every annual report. It suits holding periods of years, when cash flows have time to show up in the price.
Best for dividend investors
The dividend discount model, checked against free cash flow. If dividends exceed free cash flow for several years, the dividend may not be safe.
Best for beginners
A reverse DCF. It needs only the price, a discount rate and a long-run growth rate, and the answer is easy to judge against the company's history.
When intrinsic value is not the right tool
Young companies with negative free cash flow, where almost all value sits in the terminal value.
Banks and insurers, where debt is raw material and free cash flow is hard to define.
Commodity producers at a cyclical peak, where one year's cash flow overstates the normal level.
Short-term traders, since price can stay far from intrinsic value for months.
What does calculating intrinsic value cost, and how long does it take?
Calculating intrinsic value costs nothing but time: company filings are free on SEC EDGAR, Treasury yields are free on FRED, and Damodaran publishes his risk premium and industry data at no charge.
Data: free. The 10-K's cash flow statement gives operating cash flow and capital expenditures.
Tools: a spreadsheet. Ten rows of cash flows and one terminal value cover most companies.
Time: about one to two hours for a first model, and 20 minutes to update it after each quarterly 10-Q or annual 10-K.
Effort: the hard part is judgment, not arithmetic: deciding what growth and discount rate are realistic.
After you act on an estimate, the work continues. Update the model when a new filing arrives, when Treasury yields move by more than half a point, or when the company changes its guidance.
What are the common mistakes and limits of intrinsic value?
The most common intrinsic value mistake is treating the output as precise. These five errors cause most bad estimates:
Using one exceptional year as the base. P&G's free cash flow was $16.5 billion in fiscal 2024 and $14.0 billion a year later.
Setting long-run growth above the economy's. A company can't outgrow the economy forever; terminal growth of 2% to 3% is the usual range.
Mixing cash flows and discount rates. Free cash flow after interest goes with the cost of equity, not the cost of capital.
Ignoring share count. Buybacks and stock awards change per-share value; use diluted shares.
Anchoring on your own number. If the market disagrees, find out why before assuming it is wrong.
The honest limit is that nobody can check an intrinsic value directly. Damodaran describes it as the value an ideal analyst would reach:
"Consider it the value that would be attached to an asset by an all-knowing analyst with access to all information available right now and a perfect valuation model."
— Aswath Damodaran, Professor of Finance, NYU Stern School of Business, "Intrinsic Valuation" chapter
Is "buy below intrinsic value" good advice? The contrarian view
"Buy when the price is below intrinsic value" is incomplete advice, because the uncertainty in the estimate is often larger than the discount investors look for. A single-number intrinsic value hides that.
In our Procter & Gamble model, the terminal value is 57.8% of the base-case value, and reasonable inputs span $85.64 to $161.01. The high case is 88% above the low case. A buyer demanding a 25% discount to the base case would pay about $85, which is barely the low case.
The better rule is to compare the price with the whole range and ask what the price assumes. If the reverse DCF needs 7.64% growth from a company that has delivered 2.8%, the gap tells you more than any single estimate.
How should you use intrinsic value? The TruthSayer Value Range Check
The TruthSayer Value Range Check turns an intrinsic value estimate into a decision in five steps. It works for any company with positive free cash flow.
- Normalize free cash flow. Check at least five years from the 10-K and use a typical year, not the best one.
- Build today's discount rate. Use today's 10-year Treasury yield, an industry beta and a current equity risk premium.
- Run three cases. Low, base and high, changing the discount rate by about 1.5 points and long-run growth by 0.5 points.
- Run a reverse DCF. Find the growth the current price needs and compare it with the company's record.
- Place the price in the range. Act only when the price sits below the low case, or when the implied growth is clearly too pessimistic.
How does TruthSayer AI use intrinsic value?
TruthSayer AI's Valuations AI© estimates fair value for US-listed stocks and combines it with price action, institutional activity and fundamental data to flag potentially mispriced stocks. Each alert is traded in a funded account and listed on the Valuations AI© page.
Procter & Gamble shows how one company can produce different signals over time. Valuations AI© flagged PG as undervalued, bought 10 shares at $145.52 on April 23, 2026, and sold at $149.18 on June 9, 2026, for a published return of +1.83% after a $9.98 commission. Earlier, in January 2026, it flagged PG as overvalued and opened a bear call spread that closed on February 20, 2026 at a published loss of 80% on the options position.
Our textbook DCF in this article and Valuations AI© also disagree: the DCF's base case of $113.30 sits below the $145.52 entry. That is normal. Different models and inputs give different answers, which is why TruthSayer applies fixed rules to every trade: a 5% position size, a trailing stop at 3× the average true range on non-core trades, and averaging down on core trades only after a 2–3 standard deviation fall.
As of November 4, 2026, the Valuations AI© page shows a 78.44% return since inception against 32.27% for the S&P 500 over the same dates, with losing trades listed alongside winners. TruthSayer AI claims compliance with GIPS®, with firm-wide policies independently verified for September 2024 to June 2026; see the GIPS page.
We picked Procter & Gamble because its cash flows are steady enough for a textbook DCF and because it appears in TruthSayer's public trade list. All inputs come from P&G's fiscal 2026 10-K, FRED and Damodaran's January 2026 data, and every assumption is labelled.
Watch Professor Damodaran explain the foundations of intrinsic valuation in his NYU Stern course:
What should you do next?
Pick one company you own, pull five years of free cash flow from its 10-K, and run the TruthSayer Value Range Check. If the price sits above your high case, ask what growth it assumes before adding more.
Turn a value estimate into a shortlist with how to find undervalued stocks, step by step.
See how value investing fits with other approaches in investment strategies explained.
If you follow valuation alerts from a service, test its record with how to judge a signal service.
Learn what separates a real track record from a simulated one in backtested vs live-traded signals.
Look up terms such as beta and free cash flow in the TruthSayer glossary, or browse live fair-value trades on Valuations AI©.
The bottom line: Intrinsic value is the present value of a company's future free cash flow, and it is always an estimate. Our DCF puts Procter & Gamble at $113.30 per share in the base case, inside a range of $85.64 to $161.01, against a $162.06 price. Use the TruthSayer Value Range Check to compare the price with your whole range and the growth it implies, and act only when the gap is wide.
Frequently asked questions
What is the simplest way to calculate intrinsic value?
The simplest way is a one-stage DCF: next year's free cash flow per share divided by the discount rate minus long-run growth. For P&G, $6.44 ÷ (8.38% − 3%) gives about $120. It is quick but crude, because it assumes 3% growth forever from year one.
Is intrinsic value the same as fair value?
Mostly, yes. Both describe what a stock should be worth rather than its price. "Fair value" is also an accounting term under US GAAP (ASC 820) for a market-based measure, so check how a source defines it. TruthSayer's Valuations AI© uses fair value to mean a model-based estimate.
Can intrinsic value be negative?
The equity of a listed company can't be worth less than zero to shareholders, because their losses are limited to what they invested. A DCF can still produce a negative number when forecast free cash flows stay negative, which signals the method doesn't fit, not that the shares have negative value.
What should I do after I find a stock trading below intrinsic value?
First, find out why it is cheap: read the latest 10-K risk factors and the last earnings call. Then size the position small, around 5% of the portfolio as TruthSayer does, and set an exit rule such as a trailing stop before you buy.
How often should I recalculate intrinsic value?
Recalculate after each quarterly 10-Q or annual 10-K, and whenever the 10-year Treasury yield moves by more than half a point. The yield rose 0.73 points between December 31, 2025 and November 2, 2026, enough to change most DCF estimates noticeably.
Why do analysts get different intrinsic values for the same stock?
Analysts use different growth rates, discount rates and cash flow definitions. In our P&G model, moving the discount rate from 7% to 10% changed the base-case estimate from $148.31 to $88.61. As Buffett puts it, intrinsic value "is an estimate rather than a precise figure."
Sources
- Procter & Gamble, Form 10-K for fiscal year ended June 30, 2026, SEC EDGAR (filed August 4, 2026)
- Federal Reserve Bank of St. Louis, FRED series DGS10, 10-year Treasury yield (through November 2, 2026)
- Aswath Damodaran, Historical Implied Equity Risk Premiums, NYU Stern (updated January 2026)
- Aswath Damodaran, Cost of Equity and Capital by US industry, NYU Stern (data as of January 2026)
- Aswath Damodaran, "Intrinsic Valuation" chapter, NYU Stern (accessed November 4, 2026)
- Warren E. Buffett, Berkshire Hathaway, An Owner's Manual (1996)
- Aswath Damodaran, "Session 2: Intrinsic Value - Foundation", YouTube (accessed November 4, 2026)
- TruthSayer AI, Valuations AI© trade list (accessed November 4, 2026)
- Procter & Gamble closing price of $162.06 on November 3, 2026: Cboe One delayed quote via Intrinio, as used for live prices on truthsayer.com (retrieved November 4, 2026)
- TruthSayer AI, GIPS® compliance and verification (verification period September 2024 to June 2026)
This article is for educational purposes only and is not investment advice. Past performance does not guarantee future results.
Nizar Assanie
Nizar is the founder of TruthSayer AI and brings over two decades of experience in quantitative finance, investment analytics, and machine learning. His expertise spans systematic investment strategies, equity valuation, institutional capital flows, and predictive financial modeling. He leads the development of AI-driven investment strategies designed to identify market inefficiencies and optimize risk-adjusted returns.
