Info 1: intrinsic value definition
Info 2: how intrinsic value works
Info 3: calculate the intrinsic value
Info 4: future years intrinsic value
Opening information:
Intrinsic value breaks into two words intrinsic and value, intrinsic means natural or essential, value means worth, and intrinsic value means the natural worth of something.
So now let’s have a look at what is intrinsic value, how intrinsic value works in the public market, the calculation for intrinsic value, and finally how to find future years’ intrinsic value for any amount of years.
Info 1: intrinsic value definition
Intrinsic value doesn’t represent any of the specific things or objects, instead, they are methods that are used to find the natural value of one business in the public market.
There is no single scientific that a certain value is a natural value for any business, based on our understanding and different methods it’s arriving at different values.
But the core goal of finding the intrinsic value is to find the value of the one business each share today and that same method is also used to conclude the rough estimation for the future value of one business.
If the method of calculation is not based on the goal of finding a natural value for the one the calculation is not considered as intrinsic value, despite they are exposed to different amounts of calculation.
Info 2: how intrinsic value works
To find the real value of one business’s intrinsic value, most of the calculations completely start and work using the net income or earnings per share (EPS) of the one Industry.
Because the earnings of one business are what determines the surety of the business growth, without any single amount of earnings the business would go into a loss.
The next important thing is the assets of the one Industry, which that assets is equity of the one institution after subtracting of whole liabilities, without equity it doesn’t matter how much the earnings would be it went into a loss soon.
The third important thing would be what amount of price the stock Investor is willing to pay for each share.
Using the three things as elements each of the calculations takes place by calculating the intrinsic value for their unique way.
Among the different methods let’s jump into the one method that helps to arrive at intrinsic value.
Info 3: calculation of intrinsic value
Say the earnings per share of the one business would be 2.4 dollars, and the Equity value or book value for each share would be 24 dollars.
And the market price of such shares would be 124 dollars.
Now let’s imagine that we need to find today’s value of this business and what would be worth of the business in 10 years.
Now we know that today’s earnings per share would be 2.5 dollars and book value would be 24 dollars, by using the earnings of 2.5 dollars roughly multiplied the 10, we would arrive at 25 dollars.
The reason we used the 10 is because whenever we buy any business normally investor prefer to take their whole invested money out of their business in 10 years.
For private businesses, most Investors prefer to take out their own invested amount within 5 years, so private Investors would multiply by 5.
However, for your preparation, you can use any number based on how many years you’re willing to take the money out of the public Corporations.
Suppose you use 15 you would arrive at the answer of 2.5× 15 = 37.5 dollars. Here this 37.5 dollars is an intrinsic value is a fair value for you or if you use the 10 the fair value of Intrinsic value would be 25 dollars.
Now to find the next three, four, or ten, or any amount of years, we just need to use the past growth rate of the business. So let’s see how to find the next intrinsic value of the 10 years like a calculation for today’s intrinsic value.
Info 4: Future year’s intrinsic value
However to conclude the amount of future value of the business, which means any amount of years of future intrinsic value we need a growth rate number.
The majority of the people who want to calculate the future intrinsic value would take the past growth rate of 10 years from the 10 years of earning growth of the company.
Some other investors also take the growth rate of equity over the past ten years because equity growth is the one that determines how well such businesses use and improve an earning company over the past year.
Think that the average equity growth of the past 10 years is 20 percent for any of the public Corporations. Now to arrive at the ten years of the intrinsic value add the 20 percent with 2.5 dollars earning for the ten times consistently.
You will arrive at an earning of 15.4 dollars for each share with an average growth of 20 percent for the next 10 years, then use your rough numbers by understanding how many years you need to earn the whole invested amount into such a business.
Moreover, with the use of the 12 for 12 years, we would get the answer of 15.4 × 12 is 184 dollars. So the hundred and eighty-four is the intrinsic value of the business in the calculation of ten years.
To purchase the shares at a very discount under 184 dollars most people would also discount factor to find the discount cash flow of the one business. Finally, this is the core goal and the same functions that each investor would use for the intrinsic value but with a multiple-amount method. Just master one method and follow it for your use.