Definition – What is Margin of Safety?
The margin of safety is a concept that shows how far above (or below) a company’s stock is trading compared with the company’s intrinsic value.
Formula – How to calculate Margin of Safety
Margin of Safety = 1 – (Stock Current Price / Stock Intrinsic Value)
A stock has a current price of $25 and intrinsic stock value of $30.
Margin of Safety = 1 – ($25 / $30) = 1 – 0.833 = 0.167
Therefore, this company has a margin of safety of 0.167, 0r 16.7%.
Sources and more resources
- Wikipedia – Margin of Safety (Financial) – Wikipedia’s entry on margin of safety. Includes a history of the term.
- Accounting Tools – Margin of safety | Safety margin – An explanation of margin of safety. Includes some example calculations.
- Investopedia – Margin of safety – A short entry on the concept of margin of safety in the financial world.