Intrinsic Value Calculator for India : Ben Graham’s Formula

Intrinsic Value Calculator for India - FeaturedImage
Data Input
Current Market Price (Rs.)
Current Year EPS (Rs.)
Expected Growth Rate (%) in next 5 Years
10 Year Indian Government Bond Yield (%)


Report
Current Market Price (Rs.)
Intrinsic Value (Rs.)

Use of intrinsic value calculator should be an uncompromisable requirement of stock investor. But generally we buy and sell stocks only on basis of stock market observations, and feelings about the company.

But only observation will do? No. Only observing the stock market can give some hints about “timing the market”, but it is not enough.

By observing the market alone one cannot understand, “which stocks to buy”. Buying any random stocks, just on basis of feelings can be misleading. 

As we are dealing with our money here, a wrong step might lead to negative gains. Do we invest money for negative gains? No, we always invest for profit. Making losses in stock market is a problem

One cannot afford to invest in stocks based only on observations and feeling. Investments must be based on much stronger foothold.

What can provide the “strongest” foothold? 

Knowledge of intrinsic value estimation.

But if the solution to such a perennial problem is so evident, why everybody is not using this solution?

The reason is hidden in the complexity of intrinsic value estimation. Yes, it is not easy to “accurately” calculate intrinsic value.

So what is the way out? Frankly speaking, there is no easy way out. One has to “learn” estimating the intrinsic value of stocks. 

Though in this blog post, I will also provided an online intrinsic value calculator. But before using it, I will suggest you to read this content. Why?

Because this reading will help you interpret the numbers generated by the calculator better.  

So lets read more and build the skill… 

How to build the skill?

How to learn intrinsic value estimation? The first step could be “what you are doing now”, reading contents on “intrinsic value estimation”.

This is the way I have been learning this skill. So where to start reading? You are already reading one such blog post. It will expose you to the basics of intrinsic valuation. 

Specifically I can also redirect you to one of my blog post. I have provided there a simple method (steps), using which one can identify best stocks using intrinsic valuation method. Check this link

Why to go into the hassle of learning this skill, when I am already providing a free online intrinsic value calculator? Because this calculator has limitations. 

How to overcome the limitation?

Let’s understand it with an example.

Suppose one wants to cook “butter chicken”. What are the ways to do it? There can be several ways:

One can prepare it simply by using only chicken, basic marination, onion, tomato and butter. 

But to cook a perfect butter chicken a lot more ingredients, experience, and above all “the touch of hand” will make a difference. 

What is the point? Estimated intrinsic value will tend towards perfection if one can work on the following:

Intrinsic Value Calculator Ben Graham -1
  • Data Collection: Accuracy and extent of data collection. 
  • Interpretation: Comprehending the sourced data. 
  • Experience: With time, interpretation will get better. 

Here most important is “interpretation and experience”. One feeds the other. 

Key is to first collect and read the data. Interpretation skill can be developed by reading. The more one reads on intrinsic valuation methods, the better will become the interpretation. 

Intrinsic valuation is nothing but an interpretation of the business fundamentals of a company, and translating it into a “price valuation”.

Specifically what the analyst does here is to convert the interpretation into a “finite number”. This finite number is called “Intrinsic value”. 

I also have a MS EXCEL based worksheet which can be used to interpret last 10 years financial data of a company, and calculate its intrinsic value.

Though this worksheet is not perfect either, but it utilises much more data to estimate intrinsic value of stocks. Hence, it is much more reliable than my free online intrinsic value calculator. 

If “I” can prepare a calculator/worksheet like this, probably thousands in this world can do the same. So why not these people publish intrinsic value of stocks online, and make some money?

Why Intrinsic value of stocks is not freely published on internet?

Why to learn or use calculators/worksheets to estimate intrinsic value of stocks. Better will be to search this data online, right?

There are hardly any online portals who publishes reliable intrinsic value of stocks for free. You will find near-zero options like this. Why?

Estimating intrinsic value of stocks is a tough ask. How tough?

If “I” am able to provide a free online intrinsic value calculator for my reader, then it must be easy, right? No.

Just to exemplify the fact, I am using a comparison.  

My free online intrinsic value calculator use just 4 data to calculate intrinsic value:

Intrinsic Value Calculator Ben Graham -2.1

Moreover, the Benjamin Graham’s formula that it uses to estimate intrinsic value is also dated. Hence its reliability is limited. 

Meanwhile, my stock analysis worksheet utilises hosts of data from the last 10 years financial reports of the company. The formula’s that it use are proven mathematical models developed by experts. 

But even after all this work-done, I am sure this worksheet cannot predict intrinsic value of stocks like Warren Buffett.

What is the point?

Leave aside my free online intrinsic value calculator, even my stock analysis worksheet is far from perfect.

People who can estimate intrinsic value of stocks perfectly have become Warren Buffett’s and Peter Lynch’s.

I am sure, these type of people are so rich and busy that they do not have time to feed us with this data.

Moreover, I believe that intrinsic value estimation is a very special skill. People who have this skill would rather like to keep it to themselves.

I hope I am able to explain why intrinsic value of stocks are less published on internet. 

But on getmoneyrich you can have access to three tools using which you can increase your exposure to intrinsic value estimation:

  1. Free intrinsic value calculator using Graham’s Formula…here. 
  2. Intrinsic value calculator using free cash flow concept…here.
  3. A more detailed stock analysis worksheet

So now we have few tools which can be used to approximately estimate intrinsic value of stocks.

Approximate price: Minimum, maximum

Intrinsic Value Calculator Ben Graham -approximate

When we buy groceries, pay bills etc, we keep a watch on the bill amount, right? Why?

Because we have a feeling of their “right amounts”. If every week we spend Rs.3,500 on groceries, and the current bill is Rs.5,000, we will know that we are overspending. 

This feeling about the right price, helps us to make the right buying decision.

There is one more layer to this understanding. People who bargain are those who think that the right price is lower.

But this is also a fact that, everyone does not have the same number for ‘right price’ in their head.

Right price differ form person to person.

But this difference is not so big. If acceptable price of sugar is Rs.40/Kg, and a trader is selling it at Rs 45/Kg then he will face stiff resistance from public.

The same buying logic applies to the stocks as well. Target should be to buy cheap stocks. Knowing the range of right price of stocks is essential. How?

Example: Allow me to make a statement; “Stocks of TCS is trading at Rs 2,500 in BSE”.

How useful is this information ? Does it say that TCS stocks are undervalued? No.

But if I will say like this, “Intrinsic value of TCS is Rs.2,600, and it is currently trading at Rs 2,500 in BSE”.

This sounds more useful, right? Why? Because it helps us to compare the intrinsic value with the current price. 

These two numbers, intrinsic value and current price together gives a very three dimensional view of the stock. 

But is it ok to know intrinsic value of stocks even if it is only an “approximation”? Such an information is useful?

To answer this question, one must first understand why an investor “must” calculate intrinsic value of stocks before buying them…

Why intrinsic value calculation is necessary?

What is intrinsic value of a stock? It is an estimate of ‘true value’ of stock. True value means what?

A right price, that a stock deserves to be paid for. 

In stock investing, these two activities are most important:

  • Selection of right stock (strong fundamentals).
  • Knowledge of right price (undervalued).

Why these activities are important? Because 

Share market is full of more bad quality stocks than good ones. Hence screening-out bad ones is a big task. 

Moreover, majority quality stocks generally trade at overvalued price levels. Hence screening-out overvalued ones is again a big task. 

Buying only quality stocks which trade at undervalued price levels is the strategy that must be followed.

How to do it? There are two ways:

  1. Learn to estimate intrinsic value by self, or
  2. Use a suitable intrinsic value calculator. 

This way one can approximately establish if the stock in consideration is undervalued or overvalued. Why

Why so much fuss about undervalued stocks? What are undervalued stocks?

The stocks which trade at a price below its right price can be called as undervalued.

If one wants to become a profitable long term investors, knowledge of the right price of stocks is essential. Why?

Because otherwise there is a high chance that the person ends up buying a bad stock. How?

Lets take a simple example:

  • A stock trade at P/E ratio of 5.
  • Others stock trade at P/E ratios of 40.

Which stock looks overvalued by looking at PE? PE40 one right?

Generally speaking, high P/E ratio hints at stock being overvalued. But investors still buy high P/E stocks. Why?

Because even if the P/E is high, the stock may still be trading at undervalued price levels.

Yes this is possible. But the problem is, how to know about it. For this, one has to estimate the intrinsic value. From where?

Try using intrinsic value calculators…provided here.

But these calculators are not accurate. So how to make sure that we do not end up buying a stock at wrong price. 

As Warren Buffett says, “by applying the margin of safety“…

What is “margin of Safety”?

Considering that the “intrinsic value calculation” is half calculation and half skill, hence an investor must maintain a “factor of safety” while buying stocks. Why?

Because a highly skilled person (like Warren Buffett) can estimate intrinsic value fairly accurately. 

But a less skilful person (say Mani) may not value stocks as accurately. 

Hence, in value investing terms, Mani must maintain a factor of safety while buying his stocks. 

In value investing terms, the factor of safety has been better known as “Margin of Safety”.

Maintaining the margin of safety is essential. Warren Buffett never buy stocks without maintaining a margin of safety (even though he is a champion of value investing). 

The rule says, stocks must be bought at market price equal to 2/3rd of its intrinsic value.

Suppose a stock has intrinsic value of $300. Two-third of intrinsic value means 2/3 x $300 = $200. If market price of stock is $200 or below, only then the stocks must be bought.

Intrinsic value calculation is only an estimate. Different experts has their own way of estimating intrinsic value.

By maintaining a margin of safety, one adds a safety factor. This further allows the investor to buy stocks at the best price levels

Intrinsic Value Calculator Ben Graham -4 - Margin of Safety

Ben Graham’s Formula…

Ben Graham’s value investing formula is a very simplified stock valuation tool.

Several decades ago Ben Graham wrote a book on value investing called Intelligent Investor. In this book he very briefly mentioned about a formula in a chapter called “Security Analysis for the Lay Investors”.

Intrinsic Value Calculator for India - 1

This book still works as a bible of value investing. In this book Ben Graham proposed value investing formula.

Stock investors can use this formula to estimate the true value of stocks.

Just to give you an idea of enormity of this value investing formula, I will give a brief introduction about Ben Graham. We all know Warren Buffett. Ben Graham was the teacher and educator of Warren Buffett.

So a formula proposed by Ben Graham must be worth a fortune.

This formula is really great, yet simple to use.

We cannot say that the intrinsic value estimated by this formula is perfect. But for an average investor, it will give us a very fair idea about true value of stocks.

From my practical experience, I can say that this formula is more than useful.

Initially I used to treat this formula as simple and ordinary. But with passage of time it worked like thoughts originator for me. How?

Generally I estimate intrinsic value of a stock as a range (maximum and minimum). When a current stock’s is within this range, it can be considered for investing.

Once the intrinsic value (range) is know, apply the margin of safety as stated in below steps:

  • Step1– Calculate intrinsic value of stock
  • Step2– Note the market price of stock
  • Step3– Compare current market price if it is trading below 2/3rd of its intrinsic value.

Ben Graham’s formula helps in estimating the minimum side of the range.

Hence I decided to code this very formula into a free intrinsic value calculator for my readers.

The formula is like this:

V = EPS x (8.5 + 2g)

VIntrinsic Value
EPSAverage EPS for the last 12 months (or one financial year)
8.5Assumed P/E ratio of Stock
gAssumed Growth Rate for the forthcoming years (7 to 10 years)

But in this formula originally proposed by Benjamin Graham, the prevailing interest rate factor was not considered.

In year 1962, Graham decided to update this formula. He inserted the interest rate factor in the existing formula. This made the Benjamin Graham’s formula even more relevant for modern times.

So the tweaked formula looked like this.

Intrinsic Value Calculator for India - 2
4.4Interest rate of AAA Corporate Bond in year 1962
YInterest rate of AAA Corporate Bond as on today

You can get the AAA bond yield from the internet

Limitation of Graham’s Formula

The problem with the above Graham’s formula is, 4.4 is the yield of AAA Corporate Bond of America.

So in Indian context it may not be so relevant, right?

So I thought to try using a slightly different formula.

But the problem is, no where I could find the yield of AAA Corporate Bonds of India in 1962.

So I thought to use an assumption.

– Today in USA, AAA Corporate bonds are yielding close to 3.5% per annum.

– Today in India, AAA Corporate bonds are yielding close to 7% per annum (3.5% difference from USA).

– 1962 in USA, AAA Corporate bonds were yielding 4.4% per annum.

– 1962 in India, AAA Corporate bonds must have been yielding 7.9% per annum (4.4%+3.5% difference).

So this assumption will make our formula look like this:

Intrinsic Value Calculator for India - 3

Let us try to use this formula on an Indian stock (TCS):

I will use Ben Graham value investing formula to find true value of Tata Consulting Services (TCS) shares:

TCS
Current Market PriceRs.1,889
g (Assumed Growth Rate )9.0%**
EPS (Average EPS)105 (I added last 4 quarter EPS)
Y (10Y Indian Government Bond Yield)7.82%***

** I looked at growth in Sales, PAT, Net Worth, Total Asset and EPS for the last five years. Looking at these growth numbers, I could estimate that in next few years, TCS could grow @9.75% p.a.

*** Instead of corporate bond yield, I have considered 10 Year Indian Government Bond Yield.

Taking all of these values and putting in Ben Graham value investing formula the intrinsic value of TCS is like this:

V = 105 x (8.5 + 2*9%) x 7.9/7.82 = 920.72

Intrinsic Value Calculator Ben Graham -5 - TCS.IV2

Apply the margin of safety. Intrinsic value of TCS will be = 2/3 x 920 = Rs.613

TCS is currently trading at P/E multiples of 24.63 at market price of Rs.1,889.

So we can say that as per our modified Graham’s formula, TCS stocks looks very overvalued.

Conclusion

Benjamin Graham’s intrinsic value formula is only a starting point of stock valuation. It will give you a rough idea of the intrinsic value of stocks.

But one must not buy stocks only on basis of this formula alone. Never use this formula in isolation as it may lead to errors.

One must cross check true value of stocks by using more detailed tools of fundamental analysis.

One can also read my other article where I have described how to value stocks.

Use of other rules, in addition to Ben Graham’s formula, for evaluating stocks can render better conclusion.

Hi. I’m Mani, I’m an Engineering graduate who in pursuit of financial independence, has converted into a full time blogger. After working in the corporate world for almost 16+ years, I bid it adieu....read more

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3 Comments

  1. First of all thank you for this wonderful post for helping to make understand the intricacies of intrinsic value. I am completely new to investment and my curiosity led me to this page when I googled for it. As you have said, this is deep knowledge and maybe I have grasped it superficially but then atleast there has been a start for me. I just wanted to ask, if we follow the concept the intrinsic value, should WE ALWAYS resist from overpriced stock even if they good stocks? Because depending on the times, most of the good stocks will be most likely overpriced at current time and should I be patient to wait for its prices to drop down (Should we really wait even if its very long) ?

    • Purchase of overpriced stocks are never advisable, no matter how big is the brand name. Thanks for asking.

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