In one of his famous letters to shareholders, Warren Buffett writes:

Accounting numbers of course, are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it....

[Intrinsic value is] an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover--and this would apply even to Charlie and me--will almost inevitably come up with at least slightly different intrinsic value figures.

The Essays of Warren Buffet: Lessons for Corporate America, 19 Cardozo L. Rev. 5, 187 (1997). To read more from this essay or many others on a variety of topics, click here for Westlaw or Lexis