For any business, intrinsic value is the value of its assets based on its own independent circumstances, independent of other businesses, or even the environment around them. The concept of intrinsic value is really quite simple: the value of any business is what it could be worth if it were to exist as an independent entity, with no connection to other businesses, government or the economy as a whole.
What is intrinsic value?
This is the intrinsic value of an asset (business, company, etc.). The intrinsic nature of the asset gives it an intrinsic value. Value is independent of external circumstances. We can also interpret the intrinsic value as the actual value of an asset.
In investment terms, this is the price an investor must pay to buy an asset. By buying at this price level, you are more likely to make a profit in the future.
The concept of intrinsic value comes from a theory called value investing. People who engage in value investing are called value investors. The objective of these investors is to buy assets (shares, etc.) at a price below their intrinsic value. Such an asset is called an undervalued asset.
Benjamin Graham is the inventor of value investing. He wrote about it extensively in his book The Intelligent Investor. The concept of buying stocks below their intrinsic value then became more popular thanks to Warren Buffett, a student of Graham.
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Necessity of recoverability
What’s the solution? The solution is to first estimate the company’s future free cash flows and then calculate its intrinsic value.
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Recommended reading: The concept of intrinsic value was introduced by the eminent economist, Irving Fisher. He realized that an object has to be valuable for two reasons: because it has utility and because you can sell it. But, the value of something is not the same thing as its price. A diamond has a high price but low intrinsic value. A mediocre painting, on the other hand, has a low price but high intrinsic value.
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