Graham Number Calculator

What is the Graham Number?

The Graham Number is a conservative stock valuation metric named after Benjamin Graham, the father of value investing and mentor to Warren Buffett. It measures the maximum price an investor should pay for a share of stock based on the company's financial fundamentals: Earnings Per Share (EPS) and Book Value Per Share (BVPS).

Benjamin Graham suggested that defensive value investors should avoid stocks trading at valuation levels above a price-to-earnings (P/E) ratio of 15 and a price-to-book (P/B) ratio of 1.5. Multiplying these two thresholds yields a combined benchmark factor of 22.5.

The Graham Number Formula

The mathematical formula for calculating the Graham Number is:

$$\text{Graham Number} = \sqrt{22.5 \times \text{EPS} \times \text{BVPS}}$$

Where:

• EPS (Earnings Per Share): The net profit earned by the company per outstanding share over the trailing twelve months.
• BVPS (Book Value Per Share): The total net asset value (equity) of the company divided by the number of outstanding shares.
• 22.5: The product of Graham's recommended maximum P/E ratio (15) and maximum P/B ratio (1.5).

Interpreting the Results and Margin of Safety

Comparing a stock's current market price against its calculated Graham Number helps evaluate potential value:

• Current Price < Graham Number: The stock is trading below its fundamental upper price threshold and may be undervalued according to Graham's defensive criteria.
• Current Price > Graham Number: The market price exceeds Graham's conservative valuation cap, suggesting the stock might be overvalued or priced at a premium.
• Margin of Safety: Calculated as $\frac{\text{Graham Number} - \text{Stock Price}}{\text{Graham Number}} \times 100$. A positive percentage indicates a buffer below the fair value ceiling.

Explore other valuation and profitability tools such as our Margin Calculator or analyze investment performance using our ROI Calculator.