Intrinsic value: what a business is worth
A stock price tells you what people are paying today. Intrinsic value is a different question: what the business itself is worth to its owners. This lesson walks through a small example, every step of the math shown, and explains why the answer is always a range.
Price and value are not the same thing
The price of a share is whatever the last buyer and seller agreed on. It can change every minute for reasons unrelated to the business.
Intrinsic value is an estimate of what the whole business is worth based on what it will actually produce. The core idea fits in one sentence: add up every dollar the business will ever send to its owners, then shrink each one for how long you must wait for it and how sure you are it will show up.
Let’s start with time.
Why $100 later is worth less than $100 now
Offered $100 today or $100 five years from now, you would take it today, for three good reasons:
- You could put it to work. Money in a savings account earns interest while you wait.
- Prices creep up. In five years, $100 will probably buy fewer groceries than it does now. This slow rise in prices is called inflation.
- Promises can break. Your friend might move away, forget, or run short of money.
This idea is called the time value of money. We can put a number on it. Say you could earn 10% a year somewhere else. Watch $100 grow:
| Year | Balance at 10% a year |
|---|---|
| Today | $100.00 |
| 1 | $110.00 |
| 2 | $121.00 |
| 3 | $133.10 |
| 4 | $146.41 |
| 5 | $161.05 |
Now run it backward. If $100 today becomes $161.05 in five years, then $100 that you won’t get until year five is worth $100 ÷ 1.6105 = about $62 today. Shrinking a future amount into today’s dollars this way is called discounting, and the yearly rate you use (here 10%) is the discount rate.
The discount rate is the return you require for waiting and for taking a chance. A steady, predictable business gets a lower rate. A shaky one gets a higher rate, which shrinks its future cash more.
A tiny discounted cash flow
A discounted cash flow (DCF) does exactly what the name says. You estimate the cash a business will produce each year, discount each year’s cash back to today, and add it all up.
The cash we care about is free cash flow: the money left over after the company pays its bills and buys the equipment it needs to keep running. It is cash the owners could take out without hurting the business. (The cash flow statement lesson shows where it comes from.)
No one can forecast every year forever, so a DCF usually forecasts a few years in detail and then adds one lump called the ending value (often called terminal value) to stand in for all the years after that.
Copper Kettle Coffee Roasters Inc. is a made-up company that roasts beans and sells them to cafes. Next year it should produce $80,000 of free cash flow. We will assume:
- Free cash flow grows 5% a year after that, through year four.
- The discount rate is 10%.
- After year four, the cash stops growing and stays at the year-four level forever.
Step 1: forecast the cash. Each year is the year before × 1.05. Year 2 is $80,000 × 1.05 = $84,000, and so on.
Step 2: discount each year. Divide by 1.10 once for each year you wait. Those are the same numbers from the table above: 1.10, 1.21, 1.331 and 1.4641.
Step 3: the ending value. A steady $92,610 a year forever is worth what you’d need in an account paying 10% to produce it: $92,610 ÷ 0.10 = $926,100. That amount is counted as of year four, so it gets discounted like year-four cash.
| Year | Free cash flow | Divide by | Worth today |
|---|---|---|---|
| 1 | $80,000 | 1.10 | $72,727 |
| 2 | $84,000 | 1.21 | $69,421 |
| 3 | $88,200 | 1.331 | $66,266 |
| 4 | $92,610 | 1.4641 | $63,254 |
| Ending value | $926,100 | 1.4641 | $632,539 |
| Total | $904,207 |
Step 4: add it up. $72,727 + $69,421 + $66,266 + $63,254 + $632,539 = $904,207. Under these assumptions, Copper Kettle is worth about $900,000 to its owners.
Notice one thing. The ending value is $632,539 ÷ $904,207 = about 70% of the total. Most of the answer rests on your guess about the far future, the part you know least about.
Small changes, big swings
Now change the assumptions a little and run the same steps again. The table below keeps everything else the same and only moves the growth rate (for years two to four) and the discount rate. Results are rounded to the nearest $1,000.
| Discount rate | 0% growth | 5% growth | 10% growth |
|---|---|---|---|
| 8% | $1,000,000 | $1,135,000 | $1,283,000 |
| 10% | $800,000 | $904,000 | $1,018,000 |
| 12% | $667,000 | $750,000 | $842,000 |
Every one of these assumptions sounds reasonable for a small coffee roaster. Yet the answers run from $667,000 to $1,283,000. The highest is almost twice the lowest.
Two patterns are worth remembering:
- A higher discount rate lowers the value. Demanding more for waiting makes future cash worth less today.
- Faster growth raises the value, but only if it really happens.
That is why careful investors talk about intrinsic value as a range, not a single number. A sensible way to say it about Copper Kettle might be: probably somewhere around $750,000 to $1.1 million, with the middle near $900,000.
What the estimate is good for
A DCF is not a crystal ball. It makes your guesses visible, so you can question them. Has this company really grown 5% a year? Is its cash steady enough to deserve a low discount rate? What has to go right for the hopeful case to come true?
Those questions send you back to the filings, which is where the real answers live. They also set up the next two lessons: valuation multiples, a quicker way to compare prices, and margin of safety, which deals with the fact that your estimate might be wrong.
- Intrinsic value
- An estimate of what a business is worth based on the cash it will produce, not on today’s share price.
- Time value of money
- The idea that money now is worth more than the same amount later.
- Discounting
- Shrinking a future amount into what it is worth today.
- Discount rate
- The yearly return you require for waiting and for risk; higher means future cash counts for less.
- Free cash flow
- Cash left after paying the bills and buying the equipment needed to keep the business running.
- Discounted cash flow (DCF)
- Adding up a business’s future free cash flows after discounting each one to today.
- Ending value
- One lump amount that stands in for all the cash after the years you forecast in detail.
Where to see it on Filing.fyi
Filing.fyi does not print an intrinsic value or a DCF for each company. It gives you the ingredients and the warning lights. The numbers on each company page come from the company’s own SEC filings, so you can check how its cash has really behaved before guessing about the future.
The four score cards help with the discount rate question. A weak Piotroski F-Score or a low Altman Z-Score suggests a riskier business, which would justify a higher rate and a lower value. A high Beneish M-Score warns that the numbers you are forecasting from might not be reliable. The AI-written summary and the filing timeline point you to the 10-K and 10-Q where growth and cash are discussed. See how to read a Filing.fyi company page and the methodology for how each score is built.
- Intrinsic value is the cash a business will hand its owners, adjusted for time and risk.
- A dollar later is worth less than a dollar now, so future cash gets discounted.
- A DCF forecasts a few years, adds an ending value, and discounts it all to today.
- Small changes in growth or discount rate swing the answer a lot, so think in ranges.
- The most useful part of a DCF is seeing which assumptions matter most.
This lesson is education, not investment advice. Examples use made-up companies and round numbers unless a real filing is named.