Methodology
How Valuo calculates intrinsic value, fair price, and margin of safety
Valuo doesn't produce a black-box AI score. Every verdict is the output of a documented, publicly-available formula — labeled by whose framework produced it. Here is the exact math, the inputs behind it, and the primary source for each method.
Quick answer
Valuo calculates a stock's intrinsic value four ways and cross-checks them: Warren Buffett's discounted cash flow (DCF), Benjamin Graham's Graham Number, Peter Lynch's PEGY fair value, and Phil Town's Rule #1 sticker price. Each produces a fair value and a margin of safety — the gap between that value and today's price.
Warren Buffett
Discounted Cash Flow (DCF) intrinsic value
Intrinsic value
IV = Σ FCFₜ ÷ (1 + r)ᵗ + Terminal Value ÷ (1 + r)ᴺ
Estimates what a business is worth from the cash it will generate over its life, discounted back to today. Valuo normalizes the free-cash-flow base (median FCF margin × current revenue) so a single spike or write-off year doesn't distort a ten-year projection, then applies a margin of safety to produce a 'buy below' price.
Inputs
- Free cash flow (base)
- Normalized: median 5-year FCF margin applied to current revenue.
- Growth rate
- Projected FCF growth, anchored to history and capped for realism.
- Discount rate (r)
- Required return; anchored above the long-term Treasury yield.
- Terminal value
- Value beyond the projection window at a modest perpetual growth rate.
- Margin of safety
- A discount to intrinsic value (typically 25–50%) that sets the buy price.
Source: Berkshire Hathaway Owner's Manual & annual shareholder letters (Warren Buffett).
Read the full DCF walkthroughBenjamin Graham
The Graham Number
Graham Number
√( 22.5 × EPS × Book Value per Share )
A deliberately conservative ceiling on what a defensive investor should pay. The constant 22.5 comes from Graham's two limits — a maximum P/E of 15 and a maximum price-to-book of 1.5 (15 × 1.5 = 22.5). A price below the Graham Number signals statistical undervaluation. It requires positive earnings and positive book value, so it doesn't apply to unprofitable or negative-equity companies.
Inputs
- EPS
- Trailing twelve-month diluted earnings per share.
- Book value per share
- Shareholders' equity divided by shares outstanding.
Source: The Intelligent Investor, Benjamin Graham (defensive-investor criteria).
Read: the Graham Number, explainedPeter Lynch
PEGY fair value
PEGY ratio
PEGY = P/E ÷ ( earnings growth rate + dividend yield )
Improves on the PEG ratio by folding dividend yield into the denominator — because dividends are part of your return too. A PEGY at or below 1.0 suggests you're paying a reasonable price for the company's growth plus income; Valuo inverts the relationship to express a PEGY-implied fair value for the stock.
Inputs
- P/E ratio
- Price divided by trailing earnings per share.
- Earnings growth rate
- Sober, evidence-based EPS growth estimate.
- Dividend yield
- Annual dividend as a percentage of price.
Source: One Up on Wall Street, Peter Lynch (growth-at-a-reasonable-price).
Read: the PEGY ratio, explainedPhil Town
Rule #1 sticker price
Sticker price
Project future EPS → future price → discount back → buy at ~50% (the MOS price)
Projects earnings forward using a conservative growth rate, applies a future P/E, then discounts the resulting future price back to a present 'sticker price' at a required rate of return. Rule #1 then only buys at roughly half of that — a built-in 50% margin of safety (the 'MOS price'). It breaks down for companies with negative equity or erratic earnings.
Inputs
- Growth rate
- Conservative long-term EPS growth estimate.
- Future P/E
- Capped at roughly twice the growth rate, per Rule #1.
- Required return
- The minimum annual return demanded (commonly ~15%).
- Margin of safety
- Buy at ~50% of sticker price.
Source: Rule #1, Phil Town.
Across all frameworks
The composite score (0–100)
The composite score (0–100) is an at-a-glance read of overall business quality across the frameworks. It measures quality — durable economics, returns on capital, consistency — not whether the stock is cheap today. Price and margin of safety are always shown separately, per framework, so a great business is never confused with a good entry point.
Why every framework carries a margin of safety
Every input above is an estimate, so every output is a range, not a fact. Benjamin Graham called the margin of safety the three most important words in investing: buy well below your estimate of value, and the discount absorbs the error in your assumptions. Valuo shows the margin of safety on every verdict — never a fair value without the gap to today's price.
See all four verdicts on any stock
Run these frameworks on any US ticker — intrinsic value, buy price, and margin of safety, in seconds. Free.
Analyze a stock free3 full analyses a month · no card required
Educational Use Only · Not Financial Advice
Analysis, scores, valuations, and buy zones are derived from publicly documented investor frameworks (Buffett, Lynch, Benjamin Graham, Phil Town) for learning purposes only. They are not recommendations from licensed financial advisors. Past performance does not guarantee future results. Prices may be delayed up to 15 minutes. Always conduct your own research before making any investment decisions.