How to Calculate the Intrinsic Value of Stocks – How to Calculate the Intrinsic Value of Stocks, It’s no surprise that stocks are currently one of the most popular investment instruments in the community.

Because the process is simple, being a stock investor can result in a sizable reward. Furthermore, this stock investment might help you accumulate financial assets for the future.

If you just want to experiment with investing but are unsure about the form of investment to pursue. This stock can be used as a suggestion for investment instruments.

How to Calculate the Intrinsic Value of Stocks

You must know and grasp many aspects of stocks, just as you must attempt new things. You must be able to examine the inherent worth of the firm in addition to selecting the proper company.

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As a result, if you are a new investor, you should understand what intrinsic value is in a firm and how to calculate it, as well as the entire explanation from Qoala below. You will be able to effectively invest in stocks this manner.

What is Stock Intrinsic Value?

Before proceeding, you must first comprehend the concept of intrinsic value. The intrinsic value of an item is the value contained inside it.

As an example, suppose you had a bag. The bag has worth because of the raw materials used, the manufacturing firm, and so on.

The greater the raw material and the better the firm, the higher the worth of the bag. Meanwhile, a stock’s intrinsic value is its true value.

This value, however, is distinct from the value, share price, or book value. As a result, the intrinsic value of this stock is determined by factors that influence whether a firm is excellent or bad. Starting with visible and intangible assets, moving on to prospects, corporate names, and so on.

Every stock investor or shareholder is required to evaluate the company’s intrinsic value since it sets the price of the shares to be purchased, whether discounted or not. Investors can get maximum future returns with a reduced stock price and the right firm.

This allows investors to decide whether to buy, hold, or sell their shares. For example, an AABB share costs IDR 2,500 per unit. The real price is IDR 1,000 per share. In certain ways, the stock price of AABB is exorbitant.

Meanwhile, ABCD shares are sold for IDR 4,500, and after deducting the intrinsic value of IDR 9,000, ABCD shares are discounted since the price is half of their true worth. As a result of the two instances of stock prices, investors can purchase ABCD shares.

Intrinsic Value Guidelines for Determining Share Purchase and Sale

For information, intrinsic value represents the present value of a stock’s cash flows. There are three simple rules to follow when deciding whether to sell, purchase, or keep shares, such as:

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If the intrinsic value is more than the current market price, the stock is considered valuable. If the stock is regarded cheap (the price is too low), it is best to buy it or hold it if it is already held.

If the intrinsic worth is less than the current market price, the shares are overpriced (the price is too expensive). If the intrinsic value equals the current market price, the stock is called fair in price and in an equilibrium state.

How to Determine Stock Intrinsic Value

To calculate the intrinsic value of a stock by computing the intrinsic value of the stock itself, you must first do the following steps:

EPS Increase

EPS (Earning Per Share) One way for calculating intrinsic value is to first determine the company’s growth.

Profit increase during the previous 5-10 years The Compound Annual Growth Rate (CAGR) method can be used to calculate a company’s profit growth.

The primary idea behind CAGR is that it shows the average growth rate of a value’s reduction and increase over a given time period, which is generally more than a year.

CAGR (V Final/V Begin) Formula 1/t – 1

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The method above may be used to calculate the average profit growth of a corporation. Vfinal is the final value of the company’s profit, Vbegin is the initial value of the company’s profit, and t is the number of years in the computation period.

Because it only estimates profit in the beginning and end periods, this method does not depict the company’s typical yearly growth. As a result, what happens between the two periods has no effect on the computation outcomes.

As a result, if you wish to calculate using CAGR, you must exercise caution since the issuer’s profit that you calculate is relatively low in the early year and rises dramatically towards the conclusion of the calculation. Enter the EPS prediction after obtaining the profit growth rate.

Author: Irdansyah
I'm a regular contributor to IRDANSYAH commander, and in my business blog, my team and I share tales on the experience of starting a business from zero, how it feels to build a startup, and how to scale-up.

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