Intrinsic value definition

Intrinsic value is the real or ‘true’ value of a financial asset – and it can be higher or lower than what the asset is currently being bought and sold for.

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What is intrinsic value?

Intrinsic value is the real or ‘true’ value of a financial asset. It’s based on a whole range of different factors, which vary depending on the asset and the person analysing it.

For example, some analysts might put greater weight on a company’s current fundamentals when determining the stock’s intrinsic value; others might focus more on the company’s potential for future growth.

 

How to calculate intrinsic value

There’s no hard-and-fast way to calculate intrinsic value. But, there are certain financial metrics that can help to create a fuller picture of an asset’s true worth before you invest. Metrics like the price-to-earnings ratio (P/E ratio) and earnings per share (EPS) can help you here.

The P/E ratio compares a company’s current stock price to its current earnings – helping you to decide whether the stock is over or undervalued. If it’s undervalued, it means that that current market value is lower than the stock’s intrinsic value.

EPS is used to calculate the value of each publicly traded share in a company, relative to the company’s earnings. Investors use EPS to show how profitable a company is on a share-by-share basis. Higher profitability means that the company might be poised for higher potential growth in the future – depending on whether those profits are reinvested back into the company, or paid out to shareholders in the form of dividends.

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