There are different ways of finding the intrinsic value of the stock. You must know how to calculate a stock’s intrinsic value using these methods to use the information available effectively. Let’s have a look at different ways in which you can calculate the intrinsic value of a share.
● Discounted Cash Flow Analysis
The discounted cash flow analysis is the most commonly used method of calculating the intrinsic value of a share. It is also known as the DCF analysis. You need to perform three simple steps while using this method to calculate the intrinsic value:
● Calculate the future cash flow of the company whose stocks you plan to invest in.
● Now, calculate the present value of all the estimated future cash flows.
● Calculate the sum of all these present values to arrive at the share’s intrinsic value.
Calculating the future cash flow of the company is quite challenging. You will have to analyze the company’s financial statements to estimate future cash flows. Also, you will have to go through news articles and editorial pieces to understand the company’s growth.Surat Wealth Management
The formula used in this method of calculating the intrinsic value of the share is:
Intrinsic value = (CF1)/(1 + r)1 + (CF2)/(1 + r)2 + (CF3)/(1 + r)3 + … + (CFn)/(1 + r)n
CF shows the cash flow, where CF1 is the cash flow of the 1st year, and so on.Indore Investment
‘r’ is the rate of return based on the existing market standards.Jaipur Stock
● Analysis Based on a Financial Metric
Another popular way of calculating the intrinsic value of a share is conducting an analysis based on a financial metric. Popular ratios like the price-to-earnings ratio, etc., can be used to calculate the share’s intrinsic value.
However, to use this metric, you must have the information available to help you calculate the P/E ratio. The formula to calculate the intrinsic value of the share using this method is:
Intrinsic value = Earnings per share (EPS) x (1 + r) x P/E ratio
Here, r stands for the expected growth rate of the earnings.
● Asset-Based Valuation
You can also use the asset-based valuation method to calculate the share’s intrinsic value. New investors use this method as it does not involve complex calculations of the future and the present values of the company’s cash flow. The formula used in this method is:
Intrinsic value = (Sum of a company’s assets, both tangible and intangible) – (Sum of a company’s liabilities)
However, this method does not consider any growth prospects of the companyHyderabad Investment. Hence, the intrinsic value calculated using this method will not aid you in making relevant comparisons and may also not give you a true picture of the actual value of the share.
● Calculating the Intrinsic Value of Options
Considering investing in options, you must know how to calculate the intrinsic valueNew Delhi Investment. As options have concrete figures and metrics, there is no need to estimate any value that will help you arrive at the option’s intrinsic value. The formula for calculating the intrinsic value of an option is:
Intrinsic value = (Stock price-option strike price) x (Number of options)
Let’s take an example to understand this better.
If a stock is trading at INR 450 per share and you have four call options, you can buy 100 shares at every call at INR 400. You can calculate the intrinsic value of the share as follows:
(INR 450 – INR 400) * 50 = INR 2500
● Dividend Discount Models
Different models factor in the cash element while calculating the intrinsic value of a share. The dividend discount model, or the DDM, is one of the most popular methods analysts use to arrive at the stock’s intrinsic value.
The formula used to calculate the intrinsic value using this method is:
The Value of the Stock = EDPS / (CCE -DGR)
Where:
● EDPS is the Expected Dividend per Share
● CCE is the Cost of Capital Equity
● DGR is the Dividend Growth Rate
In the absence of any of these values, you will not be able to use the dividend discount model to calculate the value of the shares. Several dividend discount models, like the Gordon Growth Model, etc., can be used to calculate the present value of the stocks.
● Residual Income Models
You can also use the residual income models to calculate the value of the shares. The formula that can help you calculate the value of the share is:
V0 = BV0 + S (RIt / (1 + r)t)
BV0 is the existing book value of the company’s shares
RIt is the residual income of the company for a particular period
And r is the cost of equity.
Udabur Stock
