How to Calculate the Intrinsic Value of a Stock: DCF and Graham Number Explained

By Ori Souchami | September 24, 2026

Finding the intrinsic value of a stock is the cornerstone of value investing. Instead of guessing based on chart patterns or social network sentiment, smart investors calculate what a business is actually worth.

In this guide, we'll break down the two most reliable methods for calculating fair price: the Discounted Cash Flow (DCF) model and the Graham Number.

1. The Discounted Cash Flow (DCF) Model

The DCF model operates on a simple premise: a company is worth the sum of all the cash it will generate in the future, discounted back to its present value today.

How it Works

1. Forecast Free Cash Flow (FCF): Estimate how much cash the company will generate over the next 5-10 years.
2. Calculate Terminal Value: Estimate the company's value at the end of that period.
3. Discount to Present Value: Apply a discount rate (usually the company's Weighted Average Cost of Capital, or WACC) to bring those future cash flows down to what they are worth today.

The Challenge

DCF models require predicting the future. A small change in your growth rate assumption can drastically alter the final valuation. This is where AI-powered analysis shines, analyzing 10+ years of historical data to project realistic growth trajectories rather than relying on gut feelings.

2. The Graham Number

Developed by the father of value investing, Benjamin Graham, this is a defensive valuation model. It looks purely at the company's current assets and earnings, completely ignoring future growth.

The Formula

Graham Number = Square Root of (22.5 × EPS × Book Value per Share)

• EPS: Earnings Per Share (Trailing 12 Months)
• Book Value per Share: Total Equity divided by outstanding shares.
• 22.5: Graham's rule that the Price-to-Earnings (P/E) ratio shouldn't exceed 15, and the Price-to-Book (P/B) ratio shouldn't exceed 1.5 (15 × 1.5 = 22.5).

When to Use It

The Graham Number is excellent for finding deeply undervalued, defensive stocks. However, it often undervalues modern tech companies that have few physical assets (low book value) but massive cash flows.

The Smart Approach: AI Synthesis

Relying on a single model can be dangerous. A stock might look expensive using the Graham Number but cheap based on a DCF model if it's growing rapidly.

That's why the Value Investor Dashboard combines multiple valuation models into a single Fair Price AI calculation. By conducting deep company risk analysis, scanning institutional holdings, and synthesizing DCF with defensive models, you get a much more accurate picture of a stock's true worth.

Want to see the fair price of any stock instantly? Try the Fair Price Calculator for free.