What Is the Graham Number? How to Use It to Find Undervalued Stocks

Benjamin Graham spent his career trying to answer one question: what is a stock actually worth?

His answer, distilled into a single formula, became one of the most widely used tools in value investing. The Graham Number gives you a quick, principled ceiling on what you should pay for a stock — a price above which you're likely overpaying, and below which you may be getting a genuine bargain.

This guide explains what the Graham Number is, where the formula comes from, what "margin of safety" means in practice, and how to apply it to real stocks using current data from our pipeline.

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What Is the Graham Number?

The Graham Number is a valuation metric developed by Benjamin Graham, the father of value investing and the intellectual mentor of Warren Buffett. It represents the maximum price a defensive investor should pay for a stock, based on that stock's earnings per share (EPS) and book value per share.

The formula is:

Graham Number = √(22.5 × EPS × Book Value Per Share)

If the stock's current market price is below its Graham Number, it may be undervalued. If the price is above the Graham Number, the stock is likely overpriced relative to its fundamental value.

That's the core idea. Everything else is context and nuance.

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Breaking Down the Formula

EPS: Earnings Per Share

EPS measures how much profit the company generates for each share of stock outstanding. It's the most basic measure of a company's earning power.

EPS = Net Income ÷ Shares Outstanding

A higher EPS relative to price means you're paying less for each dollar of earnings — which is the foundation of value investing.

Book Value Per Share

Book value is the company's net assets — what shareholders would theoretically receive if the company liquidated all its assets and paid off all its debts.

Book Value Per Share = (Total Assets − Total Liabilities) ÷ Shares Outstanding

Graham cared about book value because it represents a floor — a tangible backing for the stock price. A company trading below book value is, in theory, cheaper than its parts.

Why 22.5?

This is the part most explanations skip. Where does 22.5 come from?

Graham derived it from two valuation limits he considered reasonable for defensive investors:

• A maximum P/E ratio of 15 (price-to-earnings)
• A maximum P/B ratio of 1.5 (price-to-book)

When you multiply these two limits together: 15 × 1.5 = 22.5

So the Graham Number essentially combines both constraints into a single formula. It's asking: what price satisfies both a reasonable P/E limit and a reasonable P/B limit simultaneously?

Mathematically, if P = Graham Number, then:

• (P / EPS) × (P / BookValue) ≤ 22.5
• P² ≤ 22.5 × EPS × BookValue
• P ≤ √(22.5 × EPS × BookValue)

The Graham Number is the upper bound of that constraint.

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What Is Margin of Safety?

Graham didn't just want to buy stocks at fair value. He wanted to buy them significantly below fair value — because even the best analysis can be wrong, businesses face unexpected headwinds, and markets remain irrational longer than expected.

He called this buffer the margin of safety.

Margin of Safety = (Graham Number − Market Price) ÷ Graham Number × 100

A 33% margin of safety means the stock trades at 33% below its Graham Number. Graham himself recommended a minimum 33% margin of safety for defensive investors. The higher the margin of safety, the more cushion you have against being wrong.

Think of it like buying a house. If you estimate a property is worth $300,000, you don't offer $299,000 — you offer $200,000 and see what happens. The $100,000 gap is your margin of safety against a bad appraisal, a leaky roof, or a neighborhood that doesn't appreciate the way you expected.

The same logic applies to stocks. If CMCSA's Graham Number is $57.10 and it's trading at $29.39, you have a 48% margin of safety. Even if your analysis is off by 20%, you still bought at a discount to intrinsic value.

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3 Real Examples Using Pipeline Data

Let's work through actual stocks from our live pipeline. All numbers are from mid-March 2026.

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Example 1: Comcast (CMCSA) — The Deep Value Case

Data:

• Price: $29.39
• EPS: $5.39
• Book Value Per Share: $26.89

Step 1: Plug into the formula

Graham Number = √(22.5 × 5.39 × 26.89)

= √(22.5 × 144.94)

= √(3,261.15)

= $57.10

Step 2: Calculate the margin of safety

Margin of Safety = ($57.10 − $29.39) / $57.10 × 100

= $27.71 / $57.10 × 100

= 48.5%

Interpretation:

Comcast is trading at a 48.5% discount to its Graham Number. That's a substantial margin of safety — well above Graham's recommended 33% threshold.

Why is the market pricing Comcast so far below intrinsic value? The concerns are real: cord-cutting is gutting the traditional cable TV business, broadband competition is increasing, and the company carries significant debt. But Comcast's NBCUniversal segment and its broadband franchise still generate enormous cash flow.

Whether the market's pessimism is warranted or excessive is a judgment call. What the Graham Number tells you is that even with significant execution risk priced in, you're buying at a substantial discount to fundamental value. That's the kind of setup Graham spent his career looking for.

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Example 2: Truist Financial (TFC) — The Regional Bank Play

Data:

• Price: $43.97
• EPS: $3.82
• Book Value Per Share: $47.74

Step 1: Plug into the formula

Graham Number = √(22.5 × 3.82 × 47.74)

= √(22.5 × 182.37)

= √(4,103.33)

= $64.06

Step 2: Calculate the margin of safety

Margin of Safety = ($64.06 − $43.97) / $64.06 × 100

= $20.09 / $64.06 × 100

= 31.4%

Interpretation:

Truist is trading at a 31.4% discount to its Graham Number — just below Graham's 33% threshold, but still meaningfully undervalued. A defensive investor might wait for the price to slip another few dollars to clear that 33% bar. A less conservative investor might already consider it a buy.

What makes this interesting is the book value relationship: Truist's book value per share ($47.74) is higher than its market price ($43.97). The stock is trading below book. For a large, diversified regional bank — not a distressed lender — that's a meaningful signal. The market is pricing in fear about credit quality and the rate environment that may or may not materialize.

Truist also pays a 4.74% dividend yield, so you're being paid to wait while the market potentially re-rates toward fair value.

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Example 3: Huntington Bancshares (HBAN) — The Smaller Bank Opportunity

Data:

• Price: $15.18
• EPS: $1.39
• Book Value Per Share: $13.79

Step 1: Plug into the formula

Graham Number = √(22.5 × 1.39 × 13.79)

= √(22.5 × 19.17)

= √(431.33)

= $20.77

Step 2: Calculate the margin of safety

Margin of Safety = ($20.77 − $15.18) / $20.77 × 100

= $5.59 / $20.77 × 100

= 26.9%

Interpretation:

Huntington sits at a 26.9% margin of safety — meaningful, but below the classic 33% Graham threshold. It's in the "potentially undervalued" zone rather than the "screaming buy" zone.

At $15.18 with a 3.8% dividend yield, HBAN is accessible for smaller investors building a position. The bank has been a consistent dividend payer and has strong Midwestern deposit franchises. The margin of safety calculation tells you the stock isn't expensive — but also isn't as deeply discounted as CMCSA.

For a conservative value investor, this might be a "watchlist and wait" situation. For someone actively building a position, the 27% discount provides reasonable downside protection.

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What the Graham Number Doesn't Tell You

The Graham Number is a starting point, not a finish line. Here's what it doesn't capture:

1. Growth prospects. Graham developed his formula for "defensive" investors focused on value preservation. High-growth companies will frequently trade above their Graham Number — and legitimately so. A company that grows earnings 20% annually for a decade will look "overvalued" by the Graham Number for most of that decade.

2. Qualitative factors. Brand strength, competitive moats, management quality, industry tailwinds — none of these show up in EPS or book value. Two companies with identical Graham Numbers can have wildly different risk profiles.

3. Accounting differences. Book value is a GAAP construct. Asset-light businesses (software, consulting) may have minimal book value despite enormous earnings power. The Graham Number was designed for industrial-era companies with significant tangible assets.

4. Cyclical distortions. EPS at the peak of a business cycle overstates "normal" earning power. EPS at the trough understates it. Using cyclically-adjusted EPS (similar to the Shiller CAPE approach) produces more stable Graham Number estimates.

The right way to use it: As a first filter and a valuation anchor. If the Graham Number says a stock is cheap, dig deeper. If it says a stock is expensive, that's a reason to look harder before paying the premium.

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Graham Number vs. Other Valuation Methods

| Method | What It Measures | Best For | |--------|-----------------|----------| | Graham Number | Fair price ceiling using EPS + Book Value | Conservative value screening | | DCF (Discounted Cash Flow) | Present value of future free cash flows | Growth companies with predictable cash flow | | P/E Ratio | Price relative to current earnings | Quick comparative valuation | | P/B Ratio | Price relative to net assets | Financial companies, asset-heavy businesses | | EV/EBITDA | Enterprise value relative to cash earnings | Comparing companies across capital structures |

The Graham Number is best understood as a conservative floor — a way to identify stocks where you're paying a reasonable price even under pessimistic assumptions. More growth-oriented metrics like DCF or EV/EBITDA are better suited for evaluating companies where future growth is the primary value driver.

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How to Quickly Find Graham Number Stocks

Running these calculations manually for dozens of stocks is tedious. That's exactly what our Graham Number Calculator is built for.

Enter any ticker, and the calculator automatically pulls EPS and book value from our live data pipeline, computes the Graham Number, and tells you the current margin of safety — plus a plain-English verdict on whether the stock looks undervalued, fairly valued, or overpriced.

You can also use the Stock Screener to filter for stocks by margin of safety across our full universe. Sort by "Most Undervalued" and you'll see every stock in our pipeline ranked by Graham Number discount — updated daily.

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Putting It All Together

The Graham Number is one of the most elegant ideas in investing: a simple formula that combines earnings power and asset value into a single maximum price. Stocks below that price offer a margin of safety. Stocks above it demand either a growth premium or a tolerance for paying full price.

The three real examples above — Comcast, Truist, and Huntington — show the formula in action. CMCSA offers the largest margin of safety at 48.5%, driven by extreme market pessimism about cord-cutting. TFC and HBAN offer more modest but still meaningful discounts in the regional banking sector.

None of these are guaranteed winners. The margin of safety protects you — it doesn't eliminate risk. But buying meaningful businesses at significant discounts to their fundamental value is how Benjamin Graham built long-term wealth, and it's how his most famous student Warren Buffett got started.

Calculate it. Use it as a starting point. Then dig deeper.

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Disclaimer: This article is for informational and educational purposes only. It does not constitute financial advice, investment advice, or a recommendation to buy or sell any security. The Graham Number is a valuation heuristic, not a guarantee of investment performance. EPS and book value figures change quarterly as companies report earnings. Always verify current data and consult a qualified financial advisor before making investment decisions.