Understanding Intrinsic Value

Understanding Intrinsic Value
Understanding Intrinsic Value

Intrinsic value is a term that many people are familiar with, whether they have looked into investing before or not. However, it is important to understand what it means at any level of investing, especially if you are a wannabe investor who is looking to start off on the right foot.

But what does intrinsic value actually mean? And, more importantly, why is it such a huge part of investing overall? As one of the most important core concepts in investing, it is important to understand it as early as possible.

What Does Intrinsic Value Mean?

In investing, intrinsic value refers to the estimated value of a company based on its cash flow. While an investment might have a current cash value of a given amount, that does not necessarily mean that it is worth that much as an investment – cash flow changes, positive or negative, can influence the “true” value of something if you are actually interested in purchasing it.

For example, let’s say a company is worth £30k but has £10k in liabilities, outstanding payments, and other factors that would eventually need to be paid. That company’s intrinsic value would theoretically be closer to £20k because somebody who bought the company for £30k would still be saddled with that £10k of debt.

But that does not mean intrinsic value is static. The concept is constantly changing as the company’s financial situation and performance fluctuate, as do the prices of its shares. This can lead to overvaluing and undervaluing, which is not obvious with static prices.

For example, Procter & Gamble intrinsic value could be overvalued, meaning that it is being sold for more than it is actually worth. At any moment, this may swing back around into being undervalued if it develops a higher intrinsic value than the market price of that investment.

Note that intrinsic value does not necessarily mean a change in hard cash value. Assets, connections, brand IPs, and growth potential can all also influence the intrinsic value of a specific investment.

Why Is Intrinsic Value Important?

Intrinsic value is a useful way of measuring a company’s real worth, as opposed to just the current market price of its shares. In the long term, this can help investors make better decisions since the market price might not reflect the true value of a company’s operations.

This also applies to individual stocks and other non-company investments. Most investments are going to have factors that change how much they are worth, including investments made in still-being-developed products or technologies. Intrinsic value can help you identify these potentially valuable assets and determine if they are worth investing in.

Intrinsic value is meant to show the real worth of an investment, which is what an investor is buying when they buy a share or other asset. Understanding its intrinsic value can help you determine how much it is worth to you – whether it could lead to good future returns rather than just the price it is currently trading for.

Knowing how to use intrinsic value is an invaluable part of investing, especially if you want to invest wisely. While the market value of an investment is still an important piece of information to refer back to, intrinsic value reflects the overall health and potential of an investment.