Calculate the intrinsic value of a stock using the Discounted Cash Flow (DCF) model.
Estimated Intrinsic Value Per Share
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Understanding Intrinsic Value
Intrinsic value represents the "true" or "fundamental" value of an asset, such as a stock. It's an estimate based on an investor's analysis of all relevant available facts. Unlike market price, which is determined by supply and demand, intrinsic value is derived from a company's underlying financial health, its assets, earnings, and future prospects.
One of the most common methods for estimating intrinsic value is the Discounted Cash Flow (DCF) model. The Gordon Growth Model (a simplified version of DCF) is often used for mature companies with stable growth prospects.
The Gordon Growth Model Formula
The formula used in this calculator is a simplified version of the Gordon Growth Model:
Intrinsic Value = EPS / (Discount Rate – Growth Rate)
Where:
EPS (Earnings Per Share): The company's net profit divided by the number of outstanding common shares. This represents the profitability attributable to each shareholder.
Growth Rate (g): The expected constant rate at which the company's earnings are expected to grow indefinitely. This rate must be lower than the discount rate for the formula to yield a positive value.
Discount Rate (r): The minimum rate of return an investor expects to receive from an investment, given its risk profile. It's often based on the company's cost of capital or an investor's personal required return.
How to Use This Calculator:
Current EPS: Enter the company's most recently reported Earnings Per Share.
Expected Annual Growth Rate (%): Estimate the rate at which you believe the company's earnings will grow consistently each year into the future. This should be a realistic, long-term projection.
Required Rate of Return (Discount Rate) (%): Input the minimum annual return you require from this investment, considering its risk.
The calculator will then provide an estimated intrinsic value per share. Investors often compare this estimated intrinsic value to the current market price to determine if a stock is undervalued (market price intrinsic value), or fairly valued (market price ≈ intrinsic value).
Important Considerations:
The accuracy of the intrinsic value estimate heavily depends on the quality of the inputs, especially the growth rate and discount rate assumptions.
This model assumes a constant growth rate indefinitely, which may not be realistic for all companies.
It's best suited for mature, stable companies. Startups or companies with volatile earnings may require different valuation methods.
Always perform thorough due diligence beyond just this calculation.
function calculateIntrinsicValue() {
var epsInput = document.getElementById("currentEarningsPerShare");
var growthRateInput = document.getElementById("expectedGrowthRate");
var discountRateInput = document.getElementById("discountRate");
var eps = parseFloat(epsInput.value);
var growthRatePercent = parseFloat(growthRateInput.value);
var discountRatePercent = parseFloat(discountRateInput.value);
var resultDiv = document.getElementById("result-value");
resultDiv.textContent = "–"; // Reset previous result
if (isNaN(eps) || isNaN(growthRatePercent) || isNaN(discountRatePercent)) {
alert("Please enter valid numbers for all fields.");
return;
}
if (eps < 0) {
alert("Current Earnings Per Share cannot be negative.");
return;
}
if (growthRatePercent < 0 || discountRatePercent = discountRate) {
alert("Error: The growth rate must be less than the discount rate for a valid intrinsic value calculation using this model.");
return;
}
var intrinsicValue = eps / (discountRate – growthRate);
if (isNaN(intrinsicValue) || !isFinite(intrinsicValue)) {
alert("Calculation resulted in an invalid value. Please check your inputs.");
return;
}
resultDiv.textContent = "$" + intrinsicValue.toFixed(2);
}