Buffett never published one formula — he revealed a process across 48 years of letters and meetings.

1What intrinsic value actually means to Buffett

Buffett defined it in the 1994 Owner's Manual and repeated it dozens of times:

"Intrinsic value is the discounted value of the cash that can be taken out of a business during its remaining life." — 1994 Owner's Manual

At the 1998 annual meeting he simplified it even further:

"It's the present value of the stream of cash that's going to be generated by any financial asset between now and doomsday."

He also loved Aesop's framing: "A bird in the hand is worth two in the bush." Buffett said the real questions an investor must answer are:

Question 1

How many birds are in the bush? (How much cash will the business generate?)

Question 2

When can you get them out? (Over what time period?)

Question 3

How certain are you? (What's your confidence level?)

Intrinsic value is always an estimate, not a precise number. Buffett says two smart people analyzing the same business will get different answers — and that's fine, as long as both are using the same framework.

What it is NOT

Not book value Not EPS × P/E ratio Not revenue multiple Not EBITDA Not stock market price

Book value is an accounting artifact. Market price is a vote; intrinsic value is a weigh. He explicitly rejected EBITDA as a "flawed favorite of Wall Street" as recently as 2024.

2Step 1 — Calculate "owner earnings" (not net income)

Buffett introduced "owner earnings" in his 1986 letter as the only cash flow number that truly reflects what an owner actually gets to keep:

Owner Earnings = Net Income + Depreciation & Amortization + Other non-cash charges − Average annual maintenance CapEx ± Changes in working capital

The critical distinction is maintenance CapEx vs. growth CapEx. Only the spending required to maintain the current business is deducted — money spent to grow is optional and belongs to future projections.

"These represent reported earnings plus depreciation, depletion, amortization and certain other non-cash charges... less the average annual amount of capitalized expenditures for plant and equipment." — 1986 Letter

Why not use free cash flow (FCF) directly? Because reported FCF includes all capex — both maintenance and growth. Lumping them together overstates the cash cost of keeping the business running.

What to project over time

Once you have normalized owner earnings for the current year, you project them forward — typically 10 years — using a conservative growth rate based on historical performance, not management promises.

Buffett's rule: if you can't predict cash flows with reasonable confidence 10 years out, the business is outside your circle of competence — don't value it, don't buy it.

3Step 2 — Discount back to present value

The 10-year stream of owner earnings plus a terminal value must be discounted to today's dollars. Buffett's discount rate choice is deliberately simple:

Discount Rate = Long-term US Treasury bond yield (risk-free rate)

He doesn't use CAPM, beta, or weighted average cost of capital (WACC). His reasoning: if you've done the qualitative work correctly and only buy predictable businesses with moats, the business risk is already dealt with — you don't need to add a "risk premium" on top.

"The value of any stock, bond or business today is determined by the cash inflows and outflows — discounted at an appropriate interest rate — that can be expected to occur during the remaining life of the asset." — 1992 Letter, citing John Burr Williams

The full DCF formula, Buffett-style

Year 1–10: Owner Earnings × (1 + growth rate)^n ÷ (1 + discount rate)^n Terminal value: Owner Earnings in Year 10 ÷ discount rate (discounted back to present) Intrinsic Value = Sum of Years 1–10 + PV of Terminal Value

Buffett is explicit that this math only works for businesses you can predict. For most companies, he says, you simply can't forecast 10 years of cash flows reliably — so he doesn't try. The circle of competence is the real filter before the math even starts.

4Step 3 — Demand a margin of safety

Even after calculating intrinsic value, Buffett never pays it. He inherited this principle from Ben Graham: since your estimate is always uncertain, you need a cushion. Buffett buys at a meaningful discount to his estimate of intrinsic value.

Estimated intrinsic value

₹100 per share

Maximum price Buffett pays

₹60–70 per share

The margin of safety serves two purposes: it protects against errors in your DCF assumptions, and it provides extra upside when the market eventually recognizes true value. For businesses with very wide moats and highly predictable earnings (like See's Candy or Coca-Cola), he accepts a smaller margin. For murkier businesses, he requires a bigger cushion or simply passes.

"For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments."

The confidence multiplier (Aesop revisited)

Buffett adjusts his valuation informally by his confidence level in the cash flow projections. Think of it as a mental probability weight applied to the DCF output:

Adjusted Value = DCF Intrinsic Value × Confidence % High moat, predictable business → 80–90% confidence Average business → 50–60% confidence Speculative / hard to predict → Don't bother calculating

5The qualitative filters — done BEFORE the math

Buffett does the qualitative analysis first. If a business fails any of these tests, he doesn't bother with the DCF at all. The math is the last step, not the first.

Filter 1 — Circle of competence

Can he predict this business's cash flows 10 years from now with confidence? Coca-Cola: yes. A semiconductor startup: no. If no, stop here.

Filter 2 — Economic moat

Is there a durable competitive advantage — brand, switching costs, network effects, low-cost production — that will still exist in a decade? Without a moat, future cash flows are not safe to project.

Filter 3 — Management integrity

Are the people running this business honest and competent? Bad management can destroy a great business. He looks for candour, alignment with shareholders, and capital allocation track record.

Filter 4 — Simple and understandable

If the investment thesis requires 10 pages of explanation, it's probably not a good deal. The really great investments, he says, can be explained in a short paragraph.

6Putting it all together — a simplified example

Imagine evaluating a simple consumer brand (think See's Candy style):

Step 1 — Owner earnings

Net Income: ₹100 Cr + Depreciation: ₹10 Cr − Maintenance CapEx: ₹15 Cr ───────────────────────────── Owner Earnings: ₹95 Cr

Step 2 — Project 10 years at 8% growth

Owner Earnings in Year N = 95 × (1.08)^N Discount Factor for Year N = 1 ÷ (1.045)^N Present Value = Owner Earnings × Discount Factor

Year	Growth Factor (1.08)^N	Owner Earnings (₹ Cr)	Discount Factor 1 ÷ (1.045)^N	Present Value (₹ Cr)
1	1.0800	102.60	0.9569	98.18
2	1.1664	110.81	0.9157	101.47
3	1.2597	119.67	0.8763	104.87
4	1.3605	129.25	0.8386	108.38
5	1.4693	139.58	0.8025	112.02
6	1.5869	150.75	0.7679	115.76
7	1.7138	162.81	0.7348	119.64
8	1.8509	175.84	0.7032	123.65
9	1.9990	189.91	0.6729	127.79
10	2.1589	205.10	0.6439	132.07
Sum of 10-Year Present Values				₹1,143.83 Cr

Step 3 — Terminal value

Terminal Value = Year 10 Owner Earnings ÷ Discount Rate = ₹205 Cr ÷ 0.045 = ₹4,556 Cr PV of Terminal Value (discounted 10 years): ~₹2,910 Cr

Step 4 — Total intrinsic value

Intrinsic Value = ₹1,143.83 Cr + ₹2,910 Cr = ₹4,053.83 Cr Shares outstanding: 100 Cr Intrinsic Value per share: ₹40.54

Step 5 — Apply margin of safety

Max price to pay = ₹40.54 × 0.70 = ₹28.38 per share (30% margin of safety for a high-moat, predictable business)

If the market is offering this stock at ₹22–25, Buffett buys aggressively. If it's at ₹35+, he waits — no matter how good the business is.

How Warren Buffett calculates intrinsic value — a step-by-step visual guide