[Post 319] How To Calculate The Intrinsic Value Of An Stock In 6 Simple Steps

Please use this guide along with the Intrinsic Value Calculator I have created

This is based on the valuation method "margin of safety" created by Phil Town depicted in his book "Rule One"

1.Find the Earnings Per Share(TTM)

Basically ,Earning Per Share is refer to the net profit of the company divided by the number of outstanding shares.TTM refer to trailing 12 months .

So put together,EPS(TTM) refer to earning per share for the company's last 12 month.This figure can be derived from any stock search in Yahoo Finance under the summary tab(red circle).

Source:Yahoo Finance

*Do note that if the company has negative earnings per share ,it means it's spending is more than it's earning or that the particular company is losing money.In short,if the EPS TTM is negative,we cannot proceed with the calculation of the intrinsic value of the stock.

2.Find the Growth Rate

Basically ,growth rate refer to the change of percentage of the company’s performance.

We will be using the next 5 year (per annum annum) under the growth estimates.This figure can be derived from any stock search in Yahoo Finance under the analysis tab(red circle) and scoll down till the growth estimates table(black circle).

Source:Yahoo Finance

Source:Yahoo Finance

3.Enter The Minimum Rate Of Return

A minimum acceptable rate of return (MARR) is the profit an investor expects to earn as a minimum from a particular investment after taking into account all associated risks and the opportunity cost of making that investment as opposed to other possible ones.

Recommended mimimum rate of return is 15%.

4.Enter Margin Of Safety

According to the investment idea known as the "margin of safety," a stock should only be bought when its market price is much lower than its underlying worth. 

In other terms, the margin of safety is the gap between the market price and your estimate of a stock's fair price/value. 

Buying assets while this disparity is present enables an investment to be made with little downside risk since investors may set a margin of safety in accordance with their own risk preferences.

Recommended Margin Of Safety is 20%-50%

5.Enter P/E ratio

The P/E ratio aids investors in estimating a stock's market value in relation to its earnings. 

The P/E ratio, or price to earnings ratio, demonstrates what the market is ready to pay now for a stock based on its current or projected earnings. 

A high P/E may indicate that a stock's price is excessively high in relation to its earnings. 

On the other hand, a low P/E can suggest that the present stock price is undervalued in comparison to earnings.

This P/E ratio can be derived from any stock search in Yahoo Finance under the summary tab(red circle) for simplicity sake.

6.Enter the Values gathered above In the Intrinsic Value Calculator, then click Calculate

Example as below using figures from Step 1-5(AAPL)

7.Buy when stock price is less than Intrinsic Value Of Stock and sell when Stock price is more than Intrinsic Value Of Stock.

*Do not sell if you do not own any stock(aka shorting!)