1

According to the website,

https://www.investopedia.com/ask/answers/05/bookvintrinsic.asp

the intrinsic value is defined as "measure of value based on the future earnings a company is expected to generate for its investors".

But then on this same website but on a different page

https://www.investopedia.com/ask/answers/021915/if-intrinsic-value-stock-significantly-lower-market-price-should-you-avoid-purchasing-it-why-or-why.asp

it suggests that intrinsic value of a company does NOT include predictions for future earnings as shown in these statements:

  • Book value is the stock's intrinsic value. It is the amount a shareholder would be entitled to receive, in theory, if the company was liquidated.

  • Intrinsic value is the sum of all of the company's assets minus its liabilities.

To make matters more confusing, when I went to google to search for whether security analysts use a "market value vs. intrinsic value ratio", where I assumed intrinsic value is calculated via discounted cash flow method (hence includes predictions for future earnings), most google results talk about price to book ratio and some pages seem to suggest that market value vs. intrinsic value (via DCF) ratio is known as the price to book ratio.

So my questions is does the term intrinsic value include future earnings?

2

As you have found out, the same word can mean different things to different people. Also, Investopedia has the occasional article that goes against market conventions. Wikipedia defines "intrinsic value" as the present value of all future cash flows, which is more in line with the first link.

That said, there are many assumptions and qualitative factors in calculating "intrinsic value", such as:

  • growth assumptions to get future cash flows
  • discount factor used to get present value

So one person's measure of intrinsic value may be vastly different from another's.

Market price (price per share * number of shares) and book value (assets minus liabilities) are certainly more standard.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.