Graham Number Stock Valuation

$
$
$
Finance

Calculate the Graham Number, Ben Graham's conservative stock valuation formula for value investors. This metric helps identify potentially undervalued stocks by comparing intrinsic value to market price, incorporating earnings and book value metrics.

Formula

Graham Number = √(22.5 × EPS × BVPS), where 22.5 = 15 (fair P/E) × 1.5 (growth multiplier)
  • Multiplier 22.5 assumes 15x earnings and 1.5x book value for fair value
  • Graham recommended buying at ≤ 2/3 of Graham Number for margin of safety
  • Formula assumes ~8.5% annual earnings growth
  • Best for stable, established companies; less suitable for growth stocks or startups

Mature Industrial Company

Inputs
  • Earnings Per Share (EPS) ($): 5 $
  • Book Value Per Share (BVPS) ($): 50 $
  • Current Market Price ($): 40 $

A company with $5 EPS and $50 BVPS yields Graham Number of $75. Trading at $40 offers 87.5% upside to fair value. Safety price = $50 (67% of Graham Number) offers 25% upside.

Frequently asked questions

What does the Graham Number tell me?
It estimates fair intrinsic value per share. If market price < Graham Number, the stock may be undervalued. If < 2/3 Graham Number, even safer margin.
Who should use Graham Number?
Value investors seeking established, profitable companies with stable earnings. Less useful for startups, high-growth tech, or companies with negative earnings.
Can Graham Number be wrong?
Yes. It assumes historical earnings growth continues and uses fixed multipliers. Changing business fundamentals, industry disruption, or accounting manipulation can render it unreliable.