You can notice that free cash flow grows by 15% every year. The table below shows the free cash flow that this coffee shop is expected to earn. The first thing you would like to know is how much money that coffee shop generates each year. Imagine now that you want to buy a coffee shop in your local place. In this simpler case, the formula looks like this:įree Cash Flow = Operating Cash Flow – Total Capital Expenditure Example of Calculating Intrinsic Value of a Stock This approach will save you time when searching for data, but it is not so accurate. Also, for simplicity, instead of owners’ earnings, investors tend to take free cash flow. This includes all the costs necessary for the growth of the company. Since it is more difficult to find the amount of maintenance capital expenditure in the financial statements, many investors do a simpler variant and take the total capital expenditure. While maintenance capital expenditure is the amount of cash expenditures for the construction of new capital assets or the replacement, improvement, or expansion of existing capital assets. The operating cash flow measures the amount of money that a company generates through normal operations. Owners’ Earnings = Operating Cash Flow – Maintenance Capital Expenditure Below is the formula to calculate owners earnings:

The first thing we need to look at is the amount of cash the company makes that year. And how much those cash receipts would be worth today. To calculate it we need to know how much money the specific company will make in the future.

The intrinsic value or fair value of a stock as some call it is the present value of all future cash receipts.

Example of Calculating Intrinsic Value of a Stock.

Calculating intrinsic value of stock