Intrinsic value is a forward-looking measure of the fundamental worth of a business. Defined as the present value of future cash flows generated by assets, it is a truer reflection than shareholder returns of the value of your strategies and your ability to execute them. When you use intrinsic value instead of TSR to guide decision making, you are less likely to worry about the factors you can’t control directly, such as your share price. You are more likely to focus on the inputs that you can control: your corporate and capital strategies, and the alignment between them.
This simple and logical principle is familiar to most business leaders; it’s closely tied to the logic of value investing, exemplified by Warren Buffett and his former mentor, investment scholar Benjamin Graham. But putting it into practice is another matter entirely. In many companies, the strategic focus on intrinsic value is insufficient (or entirely absent); its measurement is improper or inadequate; leaders don’t fully understand the linkage between intrinsic value and corporate strategy; and, consequently, the company’s business doesn’t grow as rapidly or easily as it could.
[…]Market values measured with share price oscillate, but in most sustainable companies, they gradually come to reflect intrinsic value. The better the judgment captured in the intrinsic value metric, the more likely the market value is to correlate, because intrinsic value is a kind of predictor of ultimate market value. Only when you make decisions that consistently improve your intrinsic value can you develop sustainable value for your shareholders.
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