What Is Intrinsic Value? Formula and Calculator
What Is Intrinsic Value?
Intrinsic value is an estimate of what a stock is actually worth, based on the company's fundamentals, as opposed to whatever price the market happens to be quoting today. The whole premise of value investing rests on this gap: markets overreact, sentiment swings, and price and worth drift apart. Intrinsic value is an attempt to calculate worth independently of price, so you can tell whether the current price is cheap, fair or expensive.
Benjamin Graham proposed one of the best known formulas for estimating it, built around a company's earnings and expected growth. It's simpler than the discounted cash flow models used by professional analysts, and it was designed that way on purpose, for investors who wanted a workable estimate without building a full financial model.
Intrinsic Value Calculator
V = [EPS × (8.5 + 2g) × 4.4] ÷ Y
What the Number Is Telling You
Feed in a company's EPS, its expected growth rate, and a current bond yield, and the formula returns a single euro figure meant to represent fair value.
The comparison to actual share price is the whole point. If the calculated intrinsic value comes out meaningfully above the current share price, the formula is suggesting the stock may be undervalued. If it comes out below the current price, it's suggesting the opposite. Neither result is a buy or sell signal on its own, it's a starting point for further research, not a verdict.
Intrinsic Value Formula
Graham's revised intrinsic value formula is:
V = [EPS × (8.5 + 2g) × 4.4] ÷ Y
EPS is trailing twelve-month earnings per share, the same figure used in the Graham Number calculation. The 8.5 represents Graham's estimate of a fair P/E ratio for a company with no growth at all. g is the company's expected annual earnings growth rate over the next seven to ten years, expressed as a whole number rather than a decimal (7% growth is entered as 7, not 0.07). The 4.4 is a fixed constant Graham used to represent the average yield on high grade corporate bonds at the time he built the formula. Y is the current yield on AAA-rated corporate bonds, which adjusts the whole calculation for today's interest rate environment.
The growth term is really a compounding assumption in disguise: it's projecting how much bigger the company's earnings will be after years of compounding at that rate, which is exactly why small changes to it move the result so much.
Intrinsic Value Example
Take a company with EPS of €2.00, an expected growth rate of 8%, and a current AAA corporate bond yield of 4.5%:
V = [2.00 × (8.5 + 2 × 8) × 4.4] ÷ 4.5
V = [2.00 × 24.5 × 4.4] ÷ 4.5
V = 215.6 ÷ 4.5
V ≈ €47.91
If that company's shares are trading at €30, the formula suggests they may be undervalued relative to this estimate. If they're trading at €60, it suggests the opposite.
Limitations of the Intrinsic Value Formula
The growth rate is the biggest weak point in this whole formula, by far. It's an input the user has to supply, not something the formula derives, and small changes to it swing the result dramatically. Assume 10% growth instead of 8% and the estimated intrinsic value jumps considerably, even though nothing about the actual company changed. This makes the formula only as reliable as the growth assumption behind it, and forecasting growth seven to ten years out is genuinely difficult, even for professional analysts with far more information than a formula like this one uses.
It also relies on a single year of EPS, which brings back the same problem the Graham Number has: one unusual year, a one-off gain or a temporary slump, can throw off the whole estimate.
The bond yield adjustment was Graham's way of tying stock valuations to the broader interest rate environment, but it means the same company can show a meaningfully different intrinsic value today versus a year ago, purely because bond yields moved, with nothing about the business itself changing at all.
And like the Graham Number, it was designed with stable, established, earnings-positive companies in mind. It doesn't work for companies with negative earnings, and it's a poor fit for early-stage or high-growth companies where most of the expected value lies further out than a ten-year growth estimate can reasonably capture.
Treat the result as one data point among several, not a precise fair value. The output is only as good as the growth rate you put into it, so it's worth stress-testing the result with a couple of different growth assumptions rather than trusting a single number.
This is also why it's worth applying a margin of safety rather than buying the moment the price dips below the calculated value: the formula's own weak points mean the estimate itself deserves some skepticism, not just the price you're paying for it.
FAQ
What is a good intrinsic value result?
There's no universally "good" intrinsic value in isolation, it only means something next to the current share price. If the result comes out meaningfully above the price, the formula suggests the stock may be undervalued; below it, the opposite. In the example above, €47.91 looks attractive against a €30 share price and expensive against €60.
How accurate is Graham's intrinsic value formula?
Only as accurate as the growth rate you feed into it, and forecasting growth seven to ten years out is genuinely difficult. Small changes to that one input swing the result dramatically, so it's best treated as one data point among several rather than a precise fair value.
Nothing on this site is financial advice. It's a personal record of my own research and decisions, shared for transparency, not as a recommendation to buy or sell anything.