Intrinsic Value (wartość wewnętrzna) — what is it?
Intrinsic value is the estimated 'true' value of an asset independent of market price. A key concept in value investing and fundamental analysis.
What is intrinsic value?
Intrinsic value is the estimated "true" value of an asset — how much it's worth based on fundamentals (earnings, cash flows, assets), regardless of current market price. If the market price is lower than intrinsic value — the asset is undervalued. If higher — overvalued.
Why is intrinsic value important?
Warren Buffett: "Price is what you pay, value is what you get."
The market in the short term is a voting machine (emotions), and in the long term — a weighing machine (fundamentals). A value investor looks for companies whose market price is lower than intrinsic value — with an appropriate margin of safety.
Methods for calculating intrinsic value
1. DCF (Discounted Cash Flow)
The most popular method. It sums up the company's future cash flows, discounted to present value.
Simplified formula: Value = Σ (Cash Flow / (1 + discount rate)^n)
Challenges: requires forecasting future flows (difficult) and choosing discount rate (subjective).
2. Gordon Model (Dividend Discount Model)
For dividend-paying companies. Value = Dividend / (discount rate - dividend growth rate).
Example: Dividend PLN 5, discount rate 10%, dividend growth 3% → Value = 5 / (0.10 - 0.03) = PLN 71.4
3. Multiple valuation
Comparing ratios (P/E, P/B, EV/EBITDA) with industry average or company's historical average. Quick but simplified method.
4. Net Asset Value (NAV)
Asset value minus liabilities. Used mainly for holding companies, real estate companies and funds.
Intrinsic value vs market price
| Situation | Interpretation | Action |
|---|---|---|
| Price < Intrinsic value | Undervalued | Potential buy |
| Price ≈ Intrinsic value | Fairly valued | Hold or wait |
| Price > Intrinsic value | Overvalued | Consider selling |
Limitations
- Subjectivity — different analysts will arrive at different intrinsic values
- Forecast uncertainty — future cash flows are guesswork
- Market can be "irrational" longer than you can stay solvent — Keynes
- Doesn't work for all companies — hard to value startups without profits
How Freenance can help
Freenance allows you to track your portfolio and compare current valuations with purchase prices. You see how the market values your assets over time, which helps make investment decisions based on fundamentals, not emotions.
Want full control over your finances?
Try Freenance for free