Intrinsic Value Calculator

What this calculator does

This puts a number on what a share might be worth, as distinct from what it currently costs. The gap between those two things is the whole of value investing, and the formula here is the one most associated with Benjamin Graham, the man who taught Warren Buffett.

You give it four figures and it returns two: an intrinsic value per share, and a margin of safety showing how far the market price sits below that value. The formula looks like this, and it is worth meeting the strange constants head on:

Value = EPS × (8.5 + 2g) × (4.4 ÷ Y)

Decoding 8.5, 2 and 4.4

Three arbitrary-looking numbers, each with a specific meaning.

8.5 is the price-to-earnings ratio Graham considered fair for a company with no growth at all. A business standing still, earning the same amount year after year, is worth roughly eight and a half times those earnings. That is the floor the rest of the formula builds on.

2g adds twice the expected annual growth rate to that base multiple. A company growing at 7 percent a year gets 14 added to the 8.5, giving a P/E of 22.5. The choice of doubling is a rule of thumb, not a derivation, and it is the most aggressive part of the formula.

4.4 divided by Y adjusts for interest rates. 4.4 was roughly the average yield on high-grade, long-dated corporate bonds in the early 1960s when Graham set this out, and Y is the equivalent yield today. The logic is that shares compete with bonds for your money: when bonds pay more than 4.4 percent, shares should be worth less, and when bonds pay less, shares are worth more. So the fraction scales the whole valuation up or down against prevailing rates.

Worth knowing about the provenance too, because it changes how much weight to put on the result. The interest-rate version came from a passing remark Graham made late in his career rather than from his core method, and Graham himself wrote at length about the unreliability of forecasting. He was wary of the formula. That is not a reason to discard it, but it is a reason to treat it as a rough screen rather than a verdict.

The four numbers it asks for

1. Earnings per share. Usually the trailing twelve months figure. Prefer a normal year to an unusually good or bad one, since the formula multiplies whatever you give it.
2. Expected annual growth rate. Graham had a seven to ten year horizon in mind, so this is a long-run estimate, not next quarter. Enter 7 for 7 percent.
3. Corporate bond yield. The current yield on high-grade long-dated corporate bonds. True AAA-rated corporates have become rare since 2008, so the usual stand-in is a published index such as Moody's seasoned Aaa corporate bond yield.
4. Current market price. What the share trades at now, used only for the margin of safety.

Press Calculate for the value and the margin of safety, or Reset to clear the fields.

A share put through the formula

Take a company earning 5 per share, expected to grow at 7 percent a year, with the corporate bond yield at 4.4 percent, and the share trading at 80.

• Growth multiple: 8.5 + (2 × 7) = 22.5
• Rate adjustment: 4.4 ÷ 4.4 = 1.00, so rates are exactly where Graham's benchmark sat and no adjustment happens
• Intrinsic value: 5 × 22.5 × 1.00 = 112.50
• Margin of safety: (112.50 − 80) ÷ 112.50 = 28.89 percent

So the formula says the share is worth about 112.50 while the market is asking 80, leaving you buying at roughly 71 percent of estimated value. That gap is the margin of safety, and it deserves its own section, because it is the more important of the two outputs.

The second output is the one Graham cared about

People come to this calculator for the intrinsic value and should leave caring about the margin of safety. Graham's central idea was not that you can compute exactly what a business is worth. It was that you cannot, and that the sensible response is to insist on buying well below your estimate so that being wrong does not ruin you.

Read the percentage as your room for error. At 28.89 percent, your estimate of the company's growth could be somewhat too optimistic, or its earnings could disappoint, and you might still not lose money. At 5 percent, you are relying on your assumptions being close to exact, which for a seven to ten year growth forecast is a bold thing to rely on. A negative figure means the market price is above your estimated value, so there is no cushion at all: a price of 150 against that same 112.50 value gives −33.33 percent.

Used that way, the tool stops being a machine that tells you what a share is worth and becomes one that tells you how much you are relying on your own guesses. That is a more honest job for it, and it happens to be the one Graham intended.

How far the answer can wander

Before trusting any single output, it is worth seeing how much two of the inputs move it. Keep the same company earning 5 per share and change only the growth estimate:

• g = 3 percent: value 72.50
• g = 7 percent: value 112.50
• g = 14 percent: value 182.50
• g = 20 percent: value 242.50

Now hold growth at 7 percent and change only the bond yield:

• Y = 2.2 percent: value 225.00
• Y = 4.4 percent: value 112.50
• Y = 8.8 percent: value 56.25

The same company, with identical earnings and identical prospects, is worth anywhere from 56 to 225 depending on what you type into two boxes. Halving the bond yield doubles the valuation outright, which is why this formula produces wild numbers in very low rate environments and punishing ones when rates are high.

The practical response is not to abandon it but to use it in ranges. Run a cautious growth estimate and an optimistic one, see whether the market price still looks cheap at the cautious end, and treat any single output as one point in a spread rather than an answer. A formula this sensitive to a seven-year forecast is a screening device, and it works best at flagging shares worth investigating properly.

Questions people ask

What growth rate should I use?

A conservative long-run estimate over seven to ten years, based on the company's history and realistic prospects rather than a recent burst. Because the formula doubles it, an optimistic figure here inflates everything downstream.

Where do I find the corporate bond yield?

From a published index of high-grade long-dated corporate bond yields, such as Moody's seasoned Aaa series. Genuine AAA-rated companies are now very few, so an index is the practical stand-in.

What does a negative margin of safety mean?

That the market price is above the value the formula produced, so there is no cushion. It does not automatically mean the share is a bad investment, only that this method offers no room for your estimates to be wrong.

Should I buy a share because this says it is undervalued?

No. It is a screen, not an analysis. It ignores debt, cash flow, competition, and the quality of the business, and it is highly sensitive to two estimates. Treat a large margin of safety as a reason to look closer, not as a conclusion.

References

The formula, its base multiple of 8.5 for a no-growth company, the doubling of the expected growth rate, and the adjustment by the ratio of 4.4 to the current high-grade corporate bond yield come from Benjamin Graham, along with the concept of a margin of safety that underpins the second output. The current yield used for Y is published by Moody's and made available through the Federal Reserve Bank of St. Louis.

1. Benjamin Graham, The Intelligent Investor, revised edition, and Security Analysis (with David Dodd).
2. Moody's, Moody's Seasoned Aaa Corporate Bond Yield, retrieved from FRED, Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/AAA