What is intrinsic value?

The intrinsic value of a share is the true, fundamental value of a company, independent of the day-to-day moods of the stock market. You calculate it by looking at the company’s assets, liabilities, and expected future cash flows. For value investors, this is the ultimate compass for determining whether a share is undervalued or overvalued.

How exactly does intrinsic value work?

In the stock market, there is an important difference between price and value. Legendary investor Warren Buffett sums this up with the quote: "Price is what you pay, value is what you get." The stock price (the price) is determined daily by supply and demand, investors’ emotions, news reports, and hype. The intrinsic value (the true value), however, is determined by the economic reality of the company. To calculate this value, analysts often use the Discounted Cash Flow (DCF) method. This looks at how much money (free cash flow) the company is likely to earn in the future, and what that money is worth today.

If the stock price is well below the calculated intrinsic value, we speak of an undervalued share. If you buy the share at that moment, you create a so-called Margin of Safety (safety margin).

Intrinsic value in practice (Example)

Let’s make it concrete with a simple calculation example. Imagine you are looking at the fictitious company 'Vondel Logistiek'.

• The company has € 5 million in assets (such as warehouses, trucks, and cash).

• It has € 1 million in debt with the bank.

• The net assets are therefore € 4 million.

• In addition, you calculate that the company will generate a stable total of € 6 million in profits (cash flow) over the coming years, discounted back to today’s value.

The total intrinsic value of Vondel Logistiek in this case is € 10 million (€ 4 million + € 6 million). If the company has 1 million shares outstanding, then the intrinsic value is € 10 per share.

Is the stock price currently € 7? Then you are buying a company at a significant discount. If the market goes into a frenzy because of hype and the price rises to € 15, then the share is overvalued and you are essentially paying too much.

Opportunities and Risks

Investing based on true, fundamental value provides peace of mind, but it does require discipline. What should you pay attention to?

• Opportunity: protection against hype. By focusing on business value instead of price charts, you avoid being swept up in irrational market sentiment.

• Opportunity: capital protection. You buy assets with a built-in margin of safety. If the company performs somewhat worse than expected, this margin absorbs most of the blow.

• Risk: assumptions and estimates. Calculating future cash flows is not an exact science. If your assumptions are off, you will calculate an incorrect intrinsic value. Conservative estimating is therefore crucial.

• Risk: The Value Trap. Sometimes a share appears cheap relative to intrinsic value, but the business model has been permanently damaged (for example by new technology). In that case, the share is not undervalued, but simply headed for the abyss.

Mpartners’ vision

At Mpartners Vermogensbeheer, intrinsic value is an important part of our investment policy. As an independent manager, we strictly apply the principles of Value Investing. We do not go along with the mood of the day, chasing popular (and often overvalued) shares, or speculating on short-term price movements.

Our focus is on common sense and capital preservation. By investing only in quality companies whose intrinsic value we can calculate well, and buying them at a discount, we protect our clients’ assets from unnecessary risks. That is not a quick gamble, but responsible and sound ownership.

Want to know how we apply this sober, fundamental analysis to a portfolio starting from € 300,000? Then feel free to contact us for an informal introductory meeting about value wealth management.