Graham Number
Quick Definition
A valuation formula created by Benjamin Graham estimating the maximum fair price for a stock based on its EPS and book value per share.
Key Takeaways
- Graham Number = sqrt(22.5 x EPS x Book Value Per Share)
- Maximum price a conservative investor should pay per Benjamin Graham
- Combines P/E <= 15 and P/B <= 1.5 into a single formula
- Best for stable, asset-rich businesses; less useful for tech or growth stocks
- A useful quick screen for value investors, not a complete valuation
What Is Graham Number?
The Graham Number is a conservative valuation metric developed by Benjamin Graham, the father of value investing. It calculates the maximum price a defensive investor should pay for a stock using the formula: Graham Number = Square Root of (22.5 x EPS x Book Value Per Share). The constants derive from Graham's criteria that a stock should have a P/E ratio no higher than 15 and a Price-to-Book ratio no higher than 1.5 (15 x 1.5 = 22.5).
The formula combines two fundamental valuation anchors — earnings power and tangible asset value — into a single number. If a company has EPS of $4 and book value per share of $30, the Graham Number is sqrt(22.5 x 4 x 30) = sqrt(2,700) = approximately $52. Any price below $52 would meet Graham's conservative criteria for a defensive investment.
The Graham Number works best for traditional industrial, financial, and utility companies with stable earnings and meaningful book values. It is less useful for asset-light technology companies (where book value is small relative to earning power) or high-growth companies (where current earnings understate future potential). Despite these limitations, the Graham Number remains a useful quick-screen for identifying potentially undervalued stocks. Many value investors use it as a starting point, then conduct deeper analysis on stocks trading below their Graham Number. Warren Buffett, Graham's most famous student, started his career using this approach before evolving toward "wonderful businesses at fair prices" rather than "fair businesses at wonderful prices."
Graham Number Example
- 1A stock with $5 EPS and $40 BVPS has a Graham Number of sqrt(22.5 x 5 x 40) = $67 — buy below this price.
- 2Bank stocks often screen well against the Graham Number due to their meaningful book values.
- 3Tesla would produce a misleading Graham Number because its book value is small relative to its growth potential.
Related Terms
Book Value Per Share (BVPS)
Shareholders' equity divided by shares outstanding—representing the net asset value per share if the company were liquidated.
Intrinsic Value
The calculated "true" value of an asset based on fundamental analysis, independent of its current market price.
Margin of Safety
The discount between a stock's intrinsic value and its market price, providing a buffer against errors in valuation.
Price-to-Book Ratio (P/B)
A ratio comparing a stock's market value to its book value, used to identify potentially undervalued companies.
PEG Ratio
Price/Earnings-to-Growth ratio adjusts P/E by earnings growth rate, helping identify undervalued growth stocks.
Revenue
The total amount of money a company earns from its business activities before any expenses are deducted, also called sales or top line.
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