How to Calculate Intrinsic Value Like Warren Buffett

Warren Buffett has given the same definition of intrinsic value for decades: it is the discounted value of the cash that can be taken out of a business during its remaining life. Everything else — P/E ratios, chart patterns, analyst targets — is a shortcut or a distraction. This post walks through how to compute that number yourself using a discounted cash flow (DCF) model, the same engine behind Valuo's Buffett analysis.

What intrinsic value actually means

“Intrinsic value can be defined simply: it is the discounted value of the cash that can be taken out of a business during its remaining life.”

— Warren Buffett, Berkshire Hathaway Owner's Manual

Two ideas are doing the work here. First, a business is worth the cash it produces, not its accounting earnings and not its share price. Second, a dollar in ten years is worth less than a dollar today, so future cash has to be discounted back to the present. DCF is just those two ideas turned into arithmetic.

The DCF formula

In words: project the company's free cash flow for each year, discount each year back to today using a discount rate r, add a terminal value for everything beyond the projection window, and sum it all up. Divide by shares outstanding and you have intrinsic value per share — the number you compare to the current price.

The four inputs, and how to choose them

1. Free cash flow (the starting point)

Free cash flow (FCF) is operating cash flow minus capital expenditures — the cash truly left over for owners. Use a normalized figure, not a single lucky year: one blockbuster or one write-off can distort a base year badly. A common fix is to use the median FCF margin over five years applied to current revenue, which is exactly how Valuo normalizes its base.

2. Growth rate (the biggest lever)

Estimate how fast FCF grows over the projection window (typically 10 years). Anchor it to history and reason, not hope. A durable, mature business might compound 4–8% a year; assuming 20%+ for a decade is how DCFs get abused. When in doubt, be conservative — the margin of safety, below, is your protection against being wrong.

3. Discount rate (your required return)

The discount rate reflects the return you require and the risk of the cash flows. Buffett famously anchors to the long-term Treasury yield as a risk-free baseline and demands more for a business than for a bond. Many practitioners use 8–10%. A higher rate lowers intrinsic value — riskier or less predictable businesses deserve a higher r.

4. Terminal value (the long tail)

Beyond the projection window, a terminal value captures the rest of the company's life, usually via a modest perpetual growth rate (often near long-run GDP, ~2–3%). Because it's discounted back over many years and can dominate the total, keep its growth assumption humble.

A worked example (the shape of it)

Suppose a company generates $10 of normalized FCF per share, you project 6% growth for 10 years, discount at 9%, and apply a 2.5% terminal growth rate. Discounting each year's cash flow and the terminal value back to today might yield an intrinsic value around $170 per share. If the stock trades at $120, that's roughly a 30% margin of safety; at $190, the market is already pricing in more than your assumptions justify.

The exact figure matters less than the discipline: you now have a price anchored to cash, not to sentiment. That is the entire point of the exercise.

Skip the spreadsheet

Valuo runs this DCF automatically for any US ticker, with a normalized FCF base and a transparent margin of safety — then cross-checks it against three other frameworks (Graham, Lynch, Rule #1). See a live example on AAPL or read the exact methodology.