In 30 seconds
- Intrinsic value is the cash a company will generate over its life, brought back to today.
- A simple DCF projects free cash flow for five years, adds a terminal value, discounts everything and subtracts net debt.
- The discount rate and the terminal value move the result more than anything else: always test several scenarios.
- The value range on a Kaplio stock page is a multiples-based reference, not a DCF; use the two together.
- Demand a margin of safety: a DCF is an estimate, not a measurement.
Introduction
In fiscal 2026, which ended on June 30, Procter & Gamble generated $15,147 million of free cash flow. Five years earlier, in fiscal 2021, the figure was $15,584. Over the same stretch net income rose from $14,306 to $16,046 million, but the cash actually left over stayed flat. So what is a company like that worth? That's exactly the question a DCF answers, and the answer depends less on past numbers than on what you assume about the future.
Explanation
What intrinsic value is. Buffett defines it in Berkshire Hathaway's Owner's Manual as the discounted value of the cash that can be taken out of a business during its remaining life. Three ideas fit into that sentence. Cash counts, not accounting profit. The whole future counts, not just next year. And a dollar ten years from now is worth less than a dollar today.
An analogy helps. How much would you pay for an apartment that will bring in $10,000 a year in net rent, forever? If a 5% annual return is enough for you, up to $200,000. If you demand 8%, because you worry about tenants not paying or rates going up, only $125,000. The rent is the same; what changes is what you demand. A stock works the same way, except the rent also grows or shrinks.
How to build a simple DCF, in six steps:
1. Starting free cash flow: operating cash flow minus capital expenditure (capex). Use a normal year or an average of several (it's explained in the lesson on free cash flow).
2. Projection: grow that cash flow for five years at a rate you can defend with the company's track record.
3. Terminal value: what everything after year 5 is worth. The Gordon growth formula assumes cash flow grows forever at a small rate, which should never exceed the growth of the economy (2-3%).
4. Discount rate: the return you require for the risk. The textbook answer is the weighted average cost of capital (WACC). To start, use 7% to 10% for large, stable companies. In its reverse DCF, Kaplio uses CAPM (3.8% + beta × 5%) with a 7% floor.
5. Discounting: divide each cash flow by (1 + rate) raised to the number of years away, and add it all up. That's enterprise value.
6. From enterprise value to the share: subtract net debt and divide by the number of shares (the gap between enterprise value and market cap is covered in the lesson on EV/EBIT).
Finally, apply a margin of safety. Graham wanted to buy well below estimated value precisely because the estimate might be wrong. A DCF isn't a measurement; it's an opinion with arithmetic behind it.
Formula
Intrinsic value per share = (Enterprise value − Net debt) / Number of shares
Enterprise value = Σ FCFt / (1 + r)^t, for t = 1 to 5, + TV / (1 + r)^5
FCFt = Free cash flow in year t = Operating cash flow − Capex
r = Discount rate (WACC or required return)
TV = Terminal value = FCF5 × (1 + g) / (r − g)
g = Perpetual growth rate, equal to or below the growth of the economy
Example
Fill-in-the-blanks example: Procter & Gamble, fiscal 2026 annual report. Starting data (millions of dollars, June 30, 2026): operating cash flow of 19,556 and capex of 4,409, which gives free cash flow of 15,147. Debt of 34,138 (22,842 long-term and 11,296 short-term) and cash of 9,942: net debt of 24,196. Average diluted shares for the year: 2,422.5 million.
Assumptions: 3% annual growth for five years (cautious, since free cash flow has been flat for five years), an 8% discount rate and 2.5% perpetual growth.
| Year | Projected FCF | Factor (1.08^t) | Present value |
|---|---|---|---|
| 1 | 15,601 | 1.080 | 14,446 |
| 2 | 16,069 | 1.166 | 13,777 |
| 3 | ? | 1.260 | ? |
| 4 | 17,048 | 1.360 | 12,531 |
| 5 | 17,560 | 1.469 | 11,951 |
Your turn: work out year 3. Hint: multiply year 2 by 1.03 and divide by 1.260. (Answer: 16,552 and 13,139.)
Sum of the five years: 65,843 million.
Terminal value: 17,560 × 1.025 / (0.08 − 0.025) = about 327,250 million. Brought back to today (divided by 1.469): about 222,700.
Enterprise value: 65,843 + 222,700 = about 288,550 million. Minus net debt of 24,196: about 264,350. Divided by 2,422.5 million shares: roughly $109 per share.
Now look at how fragile that is. At a 7% discount rate, the same calculation gives about $136. At 9%, about $91. With 2% perpetual growth instead of 2.5%, about $101. And the terminal value makes up 77% of the total: three-quarters of the result depends on what happens after year 5.
The table below shows the free cash flow yield (free cash flow divided by market cap) of four big consumer staples companies: a quick way to see how much cash you're buying with every dollar you invest. Before you look: do you think P&G trades above or below that $109 today? Check it on its stock page.
Real-data example
| Company | Ticker | FCF yield |
|---|---|---|
| The Procter & Gamble Company | PG | 4.6% |
| The Coca-Cola Company | KO | 3.9% |
| PepsiCo, Inc. | PEP | 5.4% |
| Colgate-Palmolive Company | CL | 5.7% |
As of October 4, 2026, over the trailing twelve months, Colgate generates free cash flow equal to 5.7% of its market cap, PepsiCo 5.4%, Procter & Gamble 4.6% and Coca-Cola 3.9%. Put another way: for every $100 you pay for P&G today, the company generates about $4.60 of free cash flow a year. The lower the yield, the more future growth the price is already paying for.
How to read it
How to read it
Compare your value with the price. The thresholds in the table are the same ones the value range on Kaplio's stock pages uses to call a stock cheap or expensive:
| Price versus your value | Reading |
|---|---|
| 15% below or more | Cheap on your assumptions; the bigger the discount, the bigger the margin of safety, which is what Graham asked for |
| Between 15% below and 25% above | Fairly priced: the market is pricing in roughly what you assume |
| 25% above or more | Expensive, unless your assumptions are too cautious |
One important caveat: the value range on a Kaplio stock page is not a DCF. It works out where the company would trade at its median P/E for the decade and at its sector median. It's a multiples-based reference, and the page itself warns that it isn't a fair value. Your DCF is the other lens. If the two agree, you gain confidence; if your DCF lands far from the range, check your assumptions first.
By sector, a DCF fits businesses with steady, predictable cash flow: consumer staples, mature software, infrastructure. It works poorly for cyclicals (cash flow from a boom year is no base to build on) and for companies still burning cash. It doesn't apply to banks and insurers, because debt is their raw material, and Kaplio doesn't calculate it for them or for REITs.
Pitfalls and limitations
- Terminal value dominates. If it makes up more than 75-80% of the total, as with P&G, your valuation is mostly a bet on the long term.
- One point on the discount rate moves the result by 15% to 25%. Going from 8% to 7%, P&G jumps from $109 to $136. Always try three rates.
- Perpetual growth above the discount rate breaks the formula, and anything above 3% assumes the company eventually becomes bigger than the economy.
- Your free cash flow and the stock page's may not match. For P&G's fiscal 2026 (which ended in June 2026), the Kaplio stock page shows $15,913 million, while the example, which subtracts the capital expenditure line from the 10-K, uses 15,147. Different sources don't subtract exactly the same items; stick to one definition throughout your valuation.
- An unusual year as your base. Look at five years of free cash flow before you pick a starting point.
- Stock-based compensation costs no cash but dilutes shareholders. For tech companies, subtract it from cash flow or count the future shares.
Case in point: Coca-Cola, a misleading base year
In 2023, Coca-Cola generated $11,599 million of operating cash flow with capex of 1,852: free cash flow of $9,747 million. In 2025, with record net income ($13,107 million), operating cash flow came to 7,408 and free cash flow to 5,296. If you'd built your DCF on the latest year, you'd have valued Coca-Cola at little more than half what the 2023 base gives, without the business having lost half its value. Before you project anything, open the notes to the financial statements and find out whether a dip is a one-off payment or a change in the business. To check your figure against a much faster method, move on to the Graham formula; and on the Valuation tab of every stock page you'll find the DCF run in reverse: what growth today's price is pricing in.
Practice on Kaplio
Frequently asked questions
How do you calculate intrinsic value?
The most widely used method is a discounted cash flow model: project free cash flow for a few years, add a terminal value, discount everything at a rate of roughly 7% to 10% for large companies, subtract net debt and divide by the number of shares. Quicker shortcuts, such as the Graham formula, are useful as a cross-check.
How do you find equity value in a DCF?
Discounting the projected cash flows and the terminal value gives you enterprise value, the value of the whole business. To get equity value, subtract net debt: total debt minus cash. Then divide by the diluted share count to get value per share. In the P&G example, about $288,550 million minus net debt leaves roughly $264,350 million.
What is Warren Buffett's formula for calculating intrinsic value?
Buffett doesn't publish a formula. In Berkshire Hathaway's Owner's Manual he defines intrinsic value as the discounted value of the cash that can be taken out of a business during its remaining life. That is the logic of a DCF: future cash, not accounting profit, brought back to today at a rate that reflects the risk.
Is a high intrinsic value good?
Only in relation to the price. Intrinsic value matters when you compare it with what the market charges: if the price sits 15% or more below your estimate, you have a margin of safety. A high estimate built on optimistic assumptions is worthless, so test several discount rates and growth rates before trusting the number.