How to Calculate the Intrinsic Value of a Stock

Intrinsic value of stocks 

Just how easy is it to calculate the intrinsic value of a stock? It depends on which calculation method you use. Yep, there are multiple methods to pick from. We'll look at four of the most popular approaches.

1.Discounted cash flow analysis

Some economists think that discounted cash flow (DCF) analysis is the best way to calculate the intrinsic value of a stock. To perform a DCF analysis, you'll need to follow three steps:

1. Estimate all of a company's future cash flows.
2. Calculate the present value of each of these future cash flows.
3. Sum up the present values to obtain the intrinsic value of the stock.

The first step is the toughest, by far. Estimating a company's future cash flows requires you to combine the skills of Warren Buffett and Nostradamus. You'll probably need to delve into the financial statements of the business (unsurprisingly, previous cash flow statements would be a good place to start). You'll also need to gain a decent understanding of the company's growth prospects to make educated guesses about how cash flows could change in the future.

2.Comparable  company analysis (Comps)

Comparable company Analysis (also called "trading multiples or "peer group Analysis or "equity comps" or "public market multiples")

is a relative  valuation method in which you compare the current value of a business to other similar businesses by looking at trading 

Multiples like P/E, EV/EBITDA, or other ratios.Multiples of EBITDA are the  most common valuation method .  

The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current. The logic follows that, if company X trades at a 10-times P/E ratio, and company Y  has earnings of $2.50 per share, company Y’s stock must be worth $25.00 per share (assuming the companies have similar attributes).

3.Asset-based valuation

The simplest way of calculating the intrinsic value of a stock is to use an asset-based valuation. The formula for this calculation is straightforward:

Intrinsic value = (Sum of a company's assets, both tangible and intangible) – (Sum of a company's liabilities)

What is RoboBasketball's intrinsic value using this approach? Let's assume the company's assets totaled $500 million. Its liabilities totaled $200 million. Subtracting the liabilities from the assets would give an intrinsic value of $300 million for the stock.

There is a downside to using asset-based valuation, though: It doesn't incorporate any growth prospects for a company. Asset-based valuation can often yield much lower intrinsic values than the other approaches.

4.Precedent Transactions

Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired.

The values represent the en bloc value of a business. They are useful for M&A transactions, but can easily become stale-dated and no longer reflective of the current market as time passes. They are less commonly used than Comps or market trading multiples.