Definition
Margin of safety is the buffer between estimated intrinsic value and purchase price, used to protect against uncertainty.
Formula
Margin of safety = (intrinsic value - price) / intrinsic value
Example
If intrinsic value is $100 and price is $70, margin of safety is 30%.
How to use it
- Use larger margins of safety when assumptions are uncertain.
- Combine with sensitivity analysis to test downside risk.
Common mistakes
- Treating a single valuation point as precise truth.
- Ignoring changes in discount rates or growth expectations.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Margin of Safety" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., DCF valuation: forecast cash flows, discount rate, and terminal value) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Loan Payment Calculator: Compute monthly payment, total interest, and total paid for a loan using amortization.
- APR to APY Calculator: Convert APR to APY (and APY to APR) given compounding frequency.
- Real Return (Inflation-adjusted) Calculator: Convert nominal return into real return given an inflation rate (and compare the difference).
- Deferred Revenue Rollforward Calculator: Bridge billings to recognized revenue by rolling deferred revenue forward for a period.
- Break-even Revenue Calculator: Estimate the revenue needed to break even given fixed costs and gross margin.
Guides
- DCF valuation: forecast cash flows, discount rate, and terminal value: A practical guide to DCF valuation and WACC discount rate choices: how to forecast FCF, choose a discount rate, and avoid terminal value traps.
- DCF sensitivity: discount rate vs terminal growth (how to read it): A practical guide to DCF sensitivity analysis: why valuations swing, how to pick ranges, and how to avoid terminal value traps.