How to Calculate Intrinsic Value (With Real Examples)

You see a stock trading at $34. Is that cheap or expensive?

Most beginners answer by looking at the price. If it went down from $50 to $34, it feels cheap. If it went up from $20 to $34, it feels expensive.

Both answers are wrong.

The price tells you what other people are paying right now. It says nothing about what the company is actually worth.

That’s where intrinsic value comes in.

Intrinsic Value in One Sentence

Intrinsic value is what a company is actually worth, based on the money it makes — not what the stock market says today.

Think of it like a house. The market price fluctuates with mood, news, and rumors. But the house itself has a real value: the rent it produces, the land it sits on, the condition of the roof. A smart buyer compares the asking price to that real value before writing a check.

Stocks work the same way.

Why Beginners Get Stuck Here

If you browse investing forums like r/ValueInvesting, you’ll see the same question over and over:

> “I understand the concept of buying below intrinsic value, but how do I actually calculate it?”

This is the #1 wall beginners hit. Everyone says “buy a dollar for 80 cents.” Nobody explains how to figure out the dollar.

The good news: you don’t need a PhD. There are two practical methods, and neither requires complex math.

Method 1: The Graham Number

Benjamin Graham — Warren Buffett’s teacher — created a simple formula to estimate intrinsic value using just two numbers from a company’s financial statements:

EPS (Earnings Per Share) — how much profit the company makes per share
BVPS (Book Value Per Share) — what the company’s net assets are worth per share

The formula:

“


Graham Number = √(22.5 × EPS × BVPS)

“

That’s it. Multiply EPS by BVPS, multiply by 22.5, take the square root.

Real example — Bank of America (BAC):

EPS = $3.49
BVPS = $26.41
Graham Number = √(22.5 × 3.49 × 26.41) = $45.53
Current price = $34.00

The stock trades at $34, but Graham’s formula says it’s worth about $45. That gap is your margin of safety — the stock trades at a 25% discount to its intrinsic value.

The 22.5 constant: Graham derived this from his assumption that a “fair” P/E ratio is 15 and a “fair” P/B ratio is 1.5. So 15 × 1.5 = 22.5. It’s a conservative baseline, not a magic number.

When it works: The Graham Number works best for stable, profitable companies with solid book value — banks, insurers, consumer goods. It’s less useful for high-growth tech companies where book value is low and earnings are reinvested.

Method 2: Discounted Cash Flow (DCF)

The Graham Number is a quick estimate. DCF goes deeper — it projects the company’s future cash flows and discounts them back to today.

The idea: a dollar tomorrow is worth less than a dollar today (inflation, risk, opportunity cost). DCF asks: “How much are all the company’s future cash flows worth right now?”

How it works (simplified):

Estimate the company’s free cash flow for the next 5 years
Assume a growth rate (conservative: 3%, crisis scenario: 0%)
Discount each year’s cash flow back to today using a discount rate
Add it all up → that’s the intrinsic value per share

Why use two methods? Because each method has limitations. Graham Number is quick but can miss growth potential. DCF is more thorough but depends heavily on your assumptions about growth rates.

This is why Value Stock Score calculates both — and then takes the more conservative one as the “real” intrinsic value. If Graham says $45 but crisis-mode DCF says $38, you use $38. Better to be pleasantly surprised than painfully disappointed.

Common Beginner Mistakes

Confusing price with value. A $300 stock can be cheap. A $5 stock can be expensive. The price per share is irrelevant without comparing it to intrinsic value.

Treating intrinsic value as exact. It’s an estimate, not a precise number. That’s why we use margin of safety — a buffer for being wrong.

Using only one method. Graham Number and DCF can disagree. Using both gives you a range, not a single point. The conservative end of that range is where you should be looking.

Ignoring the business quality. A company can be “cheap” because it’s dying. Intrinsic value only matters if the business is fundamentally sound — profitable, low debt, generating cash.

The Bottom Line

Intrinsic value is what a company is worth based on its fundamentals — not what the market price says today. You can estimate it with the Graham Number (quick) or DCF (thorough). Using both and taking the conservative one is the smartest approach.

Once you know the intrinsic value, the next question is obvious: how much of a discount do I need before buying? That’s called margin of safety — and it’s the topic of our next article.

FAQ

What is intrinsic value in simple terms?

Intrinsic value is what a company is actually worth, based on the money it makes. The stock price is what the market says today. Intrinsic value is what the business is really worth regardless of market mood.

How do you calculate intrinsic value?

Two common methods: the Graham Number formula (√(22.5 × EPS × BVPS)) for a quick estimate, or Discounted Cash Flow (DCF) for a deeper analysis. Both use numbers from the company’s financial statements — no special tools required.

What is the difference between intrinsic value and market price?

Market price is what buyers and sellers agree on right now. It swings with news, emotions, and speculation. Intrinsic value is based on fundamentals — earnings, assets, cash flow. When market price is below intrinsic value, the stock may be undervalued.

Can you calculate intrinsic value for any stock?

The Graham Number works best for profitable companies with solid book value (banks, insurers, consumer goods). DCF works for most companies but requires assumptions about future growth. High-growth companies with no profits are harder to value with either method.

Why use two methods instead of one?

Each method has blind spots. Graham Number can miss growth potential. DCF depends heavily on your growth assumptions. Using both and taking the more conservative result gives you a safety buffer — which is the whole point of value investing.

Want to see intrinsic value calculated for real S&P 500 stocks? Visit valuestockscore.com — Graham Number and DCF are calculated automatically, with a conservative margin of safety for every ticker.