Calculate the intrinsic value of a stock using a simplified Discounted Cash Flow (DCF) model.
Understanding Intrinsic Value
Intrinsic value is a fundamental concept in investing, particularly in value investing. It represents the perceived or calculated 'true' value of an asset, independent of its current market price. In essence, it's what an asset is worth based on its underlying fundamentals, such as its earnings, assets, and cash flows.
The goal for many investors is to buy assets when their market price is below their intrinsic value (a "margin of safety") and sell when the market price exceeds it. This calculator uses a simplified version of the Discounted Cash Flow (DCF) model to estimate this intrinsic value for a stock.
How the Calculation Works (Simplified DCF)
This calculator estimates intrinsic value using the following logic:
Project Future Earnings: It projects future Earnings Per Share (EPS) based on the current EPS and an expected annual growth rate for a certain period. For simplicity in this calculator, we are assuming a single EPS projection which is then used to calculate the terminal value.
Calculate Terminal Value: After a projected growth phase (implicitly considered in the perpetuity growth rate for a mature company), a company is assumed to grow at a stable rate indefinitely. The terminal value represents the present value of all future cash flows beyond the explicit forecast period. The formula used here is a variation of the Gordon Growth Model (or Constant Growth DDM), adapted for EPS:
Terminal Value = (EPS * (1 + Perpetuity Growth Rate)) / (Discount Rate - Perpetuity Growth Rate)
Discount Future Values to Present: All projected future values (earnings and terminal value) are discounted back to their present value using the required rate of return (discount rate). This accounts for the time value of money and the risk associated with receiving those future earnings.
The intrinsic value per share is then estimated by summing the present values of projected future earnings and the present value of the terminal value. For this simplified model, we focus on the terminal value as a primary driver after accounting for growth. A more complex DCF model would forecast earnings for multiple years (e.g., 5-10 years) and discount each year's earnings individually before adding the terminal value.
Formula Used (Simplified): Intrinsic Value Per Share = Projected EPS in Year 1 / (Discount Rate - Perpetuity Growth Rate)
Where Projected EPS in Year 1 = Current EPS * (1 + Growth Rate)
Note: This is a very simplified model for illustrative purposes. Real-world DCF analysis is more complex.
Using the Calculator
Current Earnings Per Share (EPS): The profit a company has made on a per-share basis.
Expected Annual EPS Growth Rate: Your projection for how much the company's EPS will grow each year.
Required Rate of Return (Discount Rate): The minimum return you expect from an investment, considering its risk.
Perpetuity Growth Rate: The assumed constant growth rate of EPS indefinitely into the future, typically a low, sustainable rate like inflation or GDP growth.
Disclaimer: This calculator is for educational and illustrative purposes only. It does not constitute financial advice. Intrinsic value estimation involves many assumptions, and actual results may vary significantly. Always conduct your own thorough research or consult with a qualified financial advisor before making investment decisions.
function calculateIntrinsicValue() {
var currentEps = parseFloat(document.getElementById("currentEps").value);
var growthRate = parseFloat(document.getElementById("growthRate").value);
var discountRate = parseFloat(document.getElementById("discountRate").value);
var perpetuityGrowthRate = parseFloat(document.getElementById("perpetuityGrowthRate").value);
var resultDiv = document.getElementById("result");
resultDiv.style.display = 'block';
// Input validation
if (isNaN(currentEps) || isNaN(growthRate) || isNaN(discountRate) || isNaN(perpetuityGrowthRate)) {
resultDiv.textContent = "Please enter valid numbers for all fields.";
resultDiv.style.backgroundColor = "#dc3545"; // Red for error
return;
}
if (discountRate <= perpetuityGrowthRate) {
resultDiv.textContent = "Discount Rate must be greater than Perpetuity Growth Rate.";
resultDiv.style.backgroundColor = "#dc3545"; // Red for error
return;
}
if (growthRate < 0 || discountRate <= 0 || perpetuityGrowthRate < 0) {
resultDiv.textContent = "Growth and discount rates should generally be positive. Perpetuity growth cannot be negative.";
resultDiv.style.backgroundColor = "#dc3545"; // Red for error
return;
}
// Convert percentages to decimals
var growthRateDecimal = growthRate / 100;
var discountRateDecimal = discountRate / 100;
var perpetuityGrowthRateDecimal = perpetuityGrowthRate / 100;
// Calculate projected EPS for the next year (Year 1)
var projectedEpsYear1 = currentEps * (1 + growthRateDecimal);
// Calculate Intrinsic Value using simplified Gordon Growth Model formula
// IV = EPS1 / (r – g)
// where EPS1 is EPS in the next period, r is the discount rate, and g is the perpetual growth rate.
var intrinsicValue = projectedEpsYear1 / (discountRateDecimal – perpetuityGrowthRateDecimal);
// Format the result
var formattedIntrinsicValue = intrinsicValue.toLocaleString(undefined, {
style: 'currency',
currency: 'USD' // Assuming USD for currency display
});
resultDiv.textContent = "Estimated Intrinsic Value: " + formattedIntrinsicValue;
resultDiv.style.backgroundColor = "var(–success-green)"; // Green for success
}