Graham Number Calculator
Calculate the Graham Number to find the intrinsic value of a stock.
What this calculator does
The Graham Number is a ceiling, not a valuation. It answers a deliberately narrow question: what is the most a cautious investor should pay for this share, given its earnings and the assets behind it? The formula is the square root of 22.5 times EPS times book value per share.
The 22.5 encodes two of Benjamin Graham's rules for the defensive investor — no more than 15 times earnings and no more than 1.5 times book value. Taking the square root of their product lets a company breach one limit provided it compensates on the other, while capping the combination.
When to use it
It works best as an initial filter across the asset-heavy parts of the UK market: banks, insurers, utilities, housebuilders, real estate investment trusts, and industrials. In those businesses the balance sheet records something real, and a price well below the Graham Number is worth investigating properly.
It is unsuitable for asset-light companies. Applied to a software firm or a consumer brand whose value lives in intangibles the accounts barely acknowledge, it will reject almost everything. Recognising where the formula does not apply matters as much as running it where it does.
Understanding the inputs
Earnings per share should preferably be averaged over several years rather than taken from the most recent annual report, since the entire approach exists to avoid being flattered by one strong year at a cyclical peak. Use diluted, statutory EPS rather than an adjusted figure.
Book value per share is total shareholders' equity divided by shares in issue, taken from the latest balance sheet. Tangible book value, which excludes goodwill and intangibles, is the more conservative input — acquisition goodwill can make a balance sheet look considerably stronger than the real assets justify.
How is this calculated?
Graham Number = √(22.5 × EPS × Book Value Per Share). Stocks trading below the Graham Number may be undervalued.
A worked example
Consider an insurer with earnings per share of £1.85 and book value per share of £12.40. Multiply 22.5 by 1.85 by 12.40 to get 516.15, and the square root is £22.72. That is the Graham Number for the share.
At a market price of £18.50 the shares sit around 19 percent below that ceiling, which is the kind of discount Graham wanted before doing further work. At £26 they trade above it and would be screened out, however persuasive the story about the company's prospects happened to sound.
Limitations and assumptions
The formula was built for an economy of tangible, capital-intensive businesses and consistently misjudges companies whose worth lies in intangibles. It uses two static accounting figures and is blind to growth, competitive position, pension deficits, debt maturity, and the quality of management.
Passing the screen is not a recommendation, and past valuation relationships do not predict future returns. Nothing here is investment advice or a personal recommendation. Graham used these criteria across diversified baskets alongside tests for earnings stability and dividend history that a single number cannot capture.
Common Questions
- What is the Graham Number?
- It is a conservative maximum price for a share, calculated as the square root of 22.5 times earnings per share times book value per share. A share trading below its Graham Number may be undervalued on Benjamin Graham's defensive criteria. It is a screening threshold, not an estimate of what a business is worth.
- Why 22.5?
- Because it is 15 times 1.5. Graham held that a defensive investor should pay no more than 15 times earnings and no more than 1.5 times book value. Multiplying those two ceilings gives a maximum acceptable product of 22.5, which the square root formula converts back into a price per share.
- Who was Benjamin Graham?
- A British-born American economist and investor, author of Security Analysis in 1934 and The Intelligent Investor in 1949, and generally credited as the founder of value investing. He taught at Columbia, where Warren Buffett studied under him, and his concept of margin of safety underpins value investing to this day.
- Does the Graham Number still work?
- Less reliably than it once did. The method leans on book value, which reflected most of a company's worth when economies ran on plant and inventory. Today much corporate value sits in brands, software, and intellectual property that accounting standards largely keep off the balance sheet, so book value understates modern businesses.
- Which UK sectors does it suit?
- Asset-heavy ones where the balance sheet means something — banks, insurers, utilities, housebuilders, REITs, and industrials. The FTSE 100 and FTSE 250 contain far more of these than the US market does, which is one reason Graham-style screens generate more candidates in London than on Wall Street.
- What if earnings or book value are negative?
- The formula breaks, since you cannot take the square root of a negative product. That is meaningful in itself — Graham's defensive criteria excluded any company without consistently positive earnings. He also demanded ten years of earnings stability and twenty years of uninterrupted dividends, tests this single number does not perform.
- Should I buy anything trading below its Graham Number?
- Certainly not on that basis alone. The formula narrows a universe; it does not make a decision. Plenty of shares sit below it because the market has correctly identified falling earnings, excessive debt, or a declining industry. Graham applied his criteria across diversified baskets, never to single holdings.
- How does this relate to price-to-book?
- Closely. The Graham Number is essentially a combined constraint on P/E and P/B. If you already know a share trades at 0.8 times book and 9 times earnings, the product is 7.2, comfortably under 22.5, and the share will pass. The formula just packages both tests into one price.
- Which earnings figure should I use?
- An average over several years rather than the latest reported twelve months. Graham deliberately smoothed earnings to avoid mistaking a cyclical peak for durable profitability — a real risk with UK miners, housebuilders, and banks. A three to seven year average EPS gives a far more defensible result.
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