Just how easy is it to calculate the intrinsic value of a stock? It depends on which calculation method you use. Yep, there are multiple methods to pick from. We'll look at four of the most popular approaches.
1.Discounted cash flow analysis
Some economists think that discounted cash flow (DCF) analysis is the best way to calculate the intrinsic value of a stock. To perform a DCF analysis, you'll need to follow three steps:
Estimate all of a company's future cash flows.
Calculate the present value of each of these future cash flows.
Sum up the present values to obtain the intrinsic value of the stock.
The first step is the toughest, by far. Estimating a company's future cash flows requires you to combine the skills of Warren Buffett and Nostradamus. You'll probably need to delve into the financial statements of the business (unsurprisingly, previous cash flow statements would be a good place to start). You'll also need to gain a decent understanding of the company's growth prospects to make educated guesses about how cash flows could change in the future.