Graham Number Calculator

Calculate Stock Intrinsic Value

Determine the maximum fair value of a stock using Benjamin Graham's formula based on earnings per share and book value per share.

Example Calculations

Try these examples to understand how the Graham Number works

Undervalued Stock Example

Undervalued Stock

A stock trading below its Graham Number

EPS: $3.2

BVPS: $18.5

Current Price: $25

Overvalued Stock Example

Overvalued Stock

A stock trading above its Graham Number

EPS: $1.8

BVPS: $12

Current Price: $45

Value Stock Example

Value Stock

A stock with strong fundamentals

EPS: $4.5

BVPS: $22

Current Price: $35

Growth Stock Example

Growth Stock

A stock with high growth potential

EPS: $2.1

BVPS: $8.5

Current Price: $30

Other Titles
Understanding Graham Number: A Comprehensive Guide
Learn how to use Benjamin Graham's formula for stock valuation and value investing

What is the Graham Number?

  • Definition and Purpose
  • Benjamin Graham's Legacy
  • Value Investing Principles
The Graham Number is a fundamental stock valuation metric developed by Benjamin Graham, the father of value investing. It provides a maximum fair value for a stock based on its earnings per share (EPS) and book value per share (BVPS).
The Core Formula
Graham Number = √(22.5 × EPS × BVPS)
The constant 22.5 represents Graham's assumption of a maximum P/E ratio of 15 and a maximum P/B ratio of 1.5 (15 × 1.5 = 22.5). This conservative approach ensures that the calculated value represents a reasonable maximum price for a stock.

Simple Calculation Example

  • If EPS = $2.00 and BVPS = $10.00, then Graham Number = √(22.5 × 2.00 × 10.00) = √450 = $21.21
  • This means the stock should not trade above $21.21 based on Graham's criteria

Step-by-Step Guide to Using the Graham Number Calculator

  • Gathering Required Data
  • Inputting Values
  • Interpreting Results
Using the Graham Number calculator is straightforward, but requires accurate financial data. Here's how to use it effectively:
Step 1: Find EPS and BVPS
Locate the company's most recent financial statements. EPS can be found in the income statement, while BVPS is calculated from the balance sheet (Total Equity ÷ Number of Shares Outstanding).
Step 2: Enter the Values
Input the EPS and BVPS values into the calculator. Optionally, enter the current stock price to compare with the calculated Graham Number.
Step 3: Analyze the Results
The calculator will show the Graham Number, P/E ratio, P/B ratio, and valuation assessment. Use these metrics to make informed investment decisions.

Best Practices

  • Always use trailing twelve months (TTM) EPS for more accurate calculations
  • Consider using average BVPS over several years for more stable results

Real-World Applications of Graham Number

  • Stock Screening
  • Portfolio Management
  • Risk Assessment
The Graham Number has numerous practical applications in investment analysis and portfolio management.
Stock Screening
Use the Graham Number to screen for potentially undervalued stocks. Stocks trading below their Graham Number may represent good value opportunities, while those trading significantly above it may be overvalued.
Portfolio Management
Incorporate Graham Number analysis into your portfolio construction process. Consider allocating more capital to stocks trading below their Graham Number and reducing exposure to overvalued stocks.
Risk Assessment
The Graham Number helps assess downside risk. Stocks trading far above their Graham Number may have limited upside potential and higher downside risk.

Practical Guidelines

  • Screen for stocks with current price < 0.8 × Graham Number for margin of safety
  • Avoid stocks trading > 1.5 × Graham Number unless strong growth prospects exist

Common Misconceptions and Correct Methods

  • Not a Buy Signal
  • Context Matters
  • Limitations of the Formula
While the Graham Number is a valuable tool, it's important to understand its limitations and avoid common misconceptions.
Not a Standalone Buy Signal
The Graham Number should not be used in isolation. It's one of many valuation metrics to consider alongside fundamental analysis, industry trends, and company-specific factors.
Industry Context Matters
Different industries have different typical P/E and P/B ratios. Technology companies may naturally trade above their Graham Number, while utility companies might trade below it.
Growth vs. Value
The Graham Number is more suitable for value stocks than growth stocks. High-growth companies may justify higher valuations that exceed the Graham Number.

Context Examples

  • A tech company with 30% annual growth may be worth more than its Graham Number
  • A mature utility company should typically trade closer to or below its Graham Number

Mathematical Derivation and Examples

  • Formula Derivation
  • Advanced Calculations
  • Sensitivity Analysis
Understanding the mathematical foundation of the Graham Number helps in its proper application and interpretation.
Formula Derivation
The Graham Number combines two key valuation ratios: P/E ratio and P/B ratio. Graham believed that a stock should not trade above 15 times earnings and 1.5 times book value simultaneously.
P/E Ratio Calculation
P/E Ratio = Current Price ÷ EPS. The Graham Number assumes a maximum P/E of 15, so: 15 = Graham Number ÷ EPS. Therefore, Graham Number = 15 × EPS.
P/B Ratio Calculation
P/B Ratio = Current Price ÷ BVPS. The Graham Number assumes a maximum P/B of 1.5, so: 1.5 = Graham Number ÷ BVPS. Therefore, Graham Number = 1.5 × BVPS.
Combining Both Constraints
To satisfy both constraints simultaneously: Graham Number = √(15 × EPS × 1.5 × BVPS) = √(22.5 × EPS × BVPS)

Detailed Calculation Examples

  • For EPS = $3.00 and BVPS = $20.00: Graham Number = √(22.5 × 3.00 × 20.00) = √1350 = $36.74
  • This means the stock should not exceed $36.74 based on Graham's criteria