How to Calculate Fair Value
Fair value is a stock's intrinsic worth, justified by its fundamentals rather than by sentiment. There is no single formula, but several proven methods. Here are the six most important, each with its formula, when it fits and a free calculator.
1. Discounted Cash Flow (DCF)
A company is worth the sum of its future free cash flows, discounted back to today. The most thorough method when cash flows are reasonably predictable.
Wert = Σ FCFₜ / (1+r)ᵗ + Terminal Value2. Earnings Multiple (P/E)
Fair value ≈ earnings per share × a fair P/E. Fast and intuitive for stable, profitable companies.
Fair value = EPS × fair P/E3. Graham Formula
Benjamin Graham's conservative rule of thumb for a fair maximum price, good as a cautious anchor.
V = EPS × (8,5 + 2g) × 4,4 / Y4. Peter Lynch Formula
A fair P/E roughly equals the growth rate. Fits growing quality companies.
fair P/E ≈ growth + dividend yield5. Dividend Discount Model (DDM)
A stock is worth the present value of all its future dividends. Ideal for steady dividend payers.
Wert = D / (r − g)6. Owner Earnings (Buffett)
Warren Buffett's approach: discount ten years of true owner earnings. For durable quality companies.
Owner earnings = net income + D&A − maintenance capexRelated models and ratios
The discount rate r that DCF and DDM need above is itself estimated: the Fama-French three-factor model derives expected return from the market, size and value factors. For growth stocks, the PEG ratio puts the P/E in the context of growth.
Frequently asked questions
Is fair value the same as market value?
No. Fair value is the intrinsic worth justified by the fundamentals; market value is the current share price. Over time they converge, but short term they can differ a lot, and that gap is exactly what you look for.
Which method is best?
No single one. Each has strengths depending on the company. That is why Fair Value Calculator runs 21 models and weights them by evidence, instead of relying on one formula.
What is the fastest way to calculate fair value?
Automatically: enter a stock into Fair Value Calculator and all 21 models run on audited fundamentals, giving you a fair value plus quality and evidence right away, free.
Educational guide, not financial advice and no buy or sell recommendation. Model estimates are not certainties.