Graham Number Calculator
Calculate the Graham Number to find the intrinsic value of a stock.
What this calculator does
The Graham Number is a valuation ceiling rather than a valuation. It answers a narrow question: what is the most a conservative investor should pay for this share, given its earnings and its book value? The formula is the square root of 22.5 times EPS times book value per share.
That 22.5 is not arbitrary. It encodes Benjamin Graham's two limits for a defensive investor — no more than 15 times earnings and no more than 1.5 times book value. The square root form allows a company to exceed one limit if it compensates on the other, while capping the product.
When to use it
The Graham Number earns its keep as a first-pass screen across asset-heavy sectors: banks, insurers, utilities, industrials, real estate. In these businesses the balance sheet reflects something real, and a price well below the Graham Number is a genuine prompt to investigate further.
It is the wrong tool for asset-light companies. Applied to a software business or a consumer brand whose value sits in intangibles the accounts barely record, it will declare almost everything overpriced. Knowing when not to use it is as important as knowing how.
Understanding the inputs
Earnings per share should ideally be an average across several years rather than the latest twelve months, since Graham's whole approach was designed to resist being flattered by a single good year at the top of a cycle. Use diluted, statutory EPS.
Book value per share is total shareholders' equity divided by shares outstanding, both from the most recent balance sheet. Consider using tangible book value, which strips out goodwill and intangibles, since acquisition-inflated goodwill can make a balance sheet look far stronger than the underlying assets warrant.
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
Take a regional bank with earnings per share of $4.10 and book value per share of $28.50. Multiply 22.5 by 4.10 by 28.50 to get 2,629.13, and the square root of that is $51.28. That is the Graham Number.
If the shares trade at $43, they sit roughly 16 percent below the ceiling, which is the kind of gap Graham would have wanted to see before looking closer. At $58 they trade above it, and on his criteria the stock would be screened out regardless of how attractive the business story sounded.
Limitations and assumptions
This formula was designed in an era of tangible, asset-intensive businesses and systematically misjudges companies whose value lies in intangibles. It uses two static accounting figures and knows nothing about growth, competitive position, debt maturity, or management quality.
Passing the screen is not a recommendation and past valuation relationships do not predict future returns. This is not investment advice. Graham applied his criteria to diversified baskets, never to a single concentrated holding, and combined them with tests for earnings stability and dividend history that this number cannot represent.
Common Questions
- What is the Graham Number?
- It is a rough ceiling on what a defensive investor should pay for a share, calculated as the square root of 22.5 times earnings per share times book value per share. A price below the Graham Number suggests the stock may be undervalued on Benjamin Graham's conservative criteria.
- Where does the 22.5 come from?
- It is 15 multiplied by 1.5. Graham argued a defensive investor should not pay more than 15 times earnings, nor more than 1.5 times book value. Multiplying the two caps gives 22.5 as the maximum acceptable product of P/E and P/B, which is what the square root formula enforces.
- Who was Benjamin Graham?
- The economist and investor widely regarded as the father of value investing, author of Security Analysis in 1934 and The Intelligent Investor in 1949. He taught at Columbia Business School, where Warren Buffett was among his students, and his emphasis on margin of safety remains the intellectual foundation of value investing.
- Does the Graham Number still work today?
- Less well than it did, and for a structural reason. Graham's method rests on book value, which captured most of a company's worth in an economy of factories and inventory. Modern businesses derive value from brands, software, and intellectual property that accounting largely leaves off the balance sheet, so book value understates them badly.
- Which companies is it most useful for?
- Asset-heavy businesses where book value is genuinely meaningful — banks, insurers, utilities, real estate, industrials, and manufacturers. For these, tangible assets on the balance sheet approximate real economic value. For software, pharmaceuticals, or consumer brands, the formula routinely flags perfectly sound companies as wildly overvalued.
- What if earnings or book value are negative?
- The formula fails — you cannot take the square root of a negative product. That is itself a signal: Graham's defensive criteria excluded companies without consistent positive earnings. He also required earnings stability over ten years and uninterrupted dividends for twenty, neither of which this single formula captures.
- Should I buy anything trading below its Graham Number?
- No. The formula is a screen that narrows a universe, not a decision. Many stocks trade below it because the market has correctly identified deteriorating earnings, unsustainable debt, or an industry in decline. Graham himself insisted on diversification across a basket of such names precisely because individual ones fail.
- How does the Graham Number relate to margin of safety?
- Directly. Graham's core idea was buying meaningfully below intrinsic value so that errors in your analysis do not become losses. The Graham Number sets a conservative maximum price; the margin of safety is the gap between that number and what you actually pay. Buying at the number itself leaves no cushion.
- What earnings figure should I use?
- Graham favored an average of several years rather than the most recent twelve months, precisely to avoid being fooled by a cyclical peak. Using a three to seven year average EPS produces a more defensible number for any business whose profits swing with the economy, which is most of the ones this formula suits.
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