Intrinsic value

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Intrinsic Value (also known as fundamental value) refers to the actual value of a security based on an underlying perception of its true value due to both tangible and intangible factors. The value may defer from the current market value. As a result, value investors use an array of analytical techniques to estimate the value of the security in the hope finding investments where the true value of the investment exceeds its current market value. It can be calculated by summing the future income generated by the assets, and discounting it to the present value.

How do we use it

The intrinsic value of a potential investment is arrived at by comparing the results of the Net Asset Value and Earnings Power Value.

If Earnings Power Value is less than Net Asset Value then the intrinsic value for the company is derived from Earnings Power Value and adds value for the probability of a catalyst taking place within the company that would bring the value of the company to its competitive state ([Net Asset Value).

If Earnings Power Value is equal to Net Asset Value then it would seem that the company being studied has no competitive advantage. Therefore, Earnings Power Value and Net Asset Value would define the intrinsic value.

If Earnings Power Value is greater than Net Asset Value then the company has what is referred to as a "franchise value". To be willing to pay for this franchise value, the investor must deem it to be sustainable. In this case the intrinsic value is derived from Net Asset Value plus added value for the probability of the company maintaining its franchise.

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