What is Intrinsic Value (Fair Value)?

What is intrinsic value or fair value? The intrinsic value of a business or any other security is the perceived true value or the inherent value of the business or security.

Understanding a company’s intrinsic value is a vital part of fundamental analysis for value investors. It is also critical in mergers and acquisitions, as it is what forms the price associated with the purchase or merger.

In financial modelling terms, the intrinsic value is the present value of all future cash flows, which are discounted at the appropriate discount rate, also known as the net present value (NPV).

There are different ways to calculate intrinsic value. However, a common intrinsic valuation method is discounted cash flow analysis (DCF analysis), which aims to determine the net present value.

Intrinsic Value Formula (Net Present Value)

Intrinsic Value Calculation
NPV calculation (Net Present Value)

NPV = net present value
FV = net cash flow for the period
i = annual interest rate
n = number of periods

Intrinsic value is different from the market value (or market cap) for two main reasons. Firstly, market value is how much people are willing to pay for a particular company or security. Therefore, it can be influenced by opinion and hype. Secondly, the market value is the value of equity, whereas intrinsic value is the value of assets minus liabilities.

If the intrinsic value is below the market value, the company could potentially be undervalued. However, an undervalued stock does not always mean a good value investment.

Further Details & Company Data

For more detailed information, including training, templates and company figures, visit one of the below sites or software providers:

Site / SoftwareDescriptionLink
CFI – Corporate Finance InstituteTraining, detailed explanations & templatesCFI Website
FinboxDetailed company financials & modelsFinbox Website
TradingViewBasic company financials & chartsTradingView Financials
SharePadCompany financials, news, filters and portfolio managementSharePad Signup Page

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