How to Calculate Intrinsic Value Using the Graham Number — Step-by-Step Formula

Disclaimer: This article is for educational purposes only and does not constitute financial advice. All investing involves risk, including possible loss of principal. Verify all data before making investment decisions.

Most people learn about intrinsic value as a vague concept. "Buy stocks when they're below what they're really worth." Great. But how do you calculate what they're really worth?

Benjamin Graham — Warren Buffett's mentor and the father of value investing — didn't leave that question unanswered. He built a formula. It's called the Graham Number, and it gives you a concrete dollar figure: the maximum price a disciplined investor should pay for a stock, based solely on earnings and book value.

In this guide, you'll get the exact formula, a step-by-step calculation using real data from Coca-Cola (KO), and an honest look at what the result actually means.

What Is the Graham Number?

The Graham Number is a ceiling price — the highest price you should pay for a stock if you want to follow Benjamin Graham's defensive investing framework.

Graham's original work established two key principles for stock valuation:

A stock should trade at no more than 15× its earnings (P/E ≤ 15)
A stock should trade at no more than 1.5× its book value (P/B ≤ 1.5)

The Graham Number combines both constraints into a single formula that calculates the maximum price satisfying both rules simultaneously.

The Graham Number Formula

Graham Number = √(22.5 × EPS × BVPS)

Where:

22.5 = the mathematical product of Graham's two limits (15 × 1.5 = 22.5)
EPS = Earnings Per Share (trailing 12 months)
BVPS = Book Value Per Share

That's it. Two inputs, one formula, one number.

Step-by-Step: Calculating Coca-Cola's Graham Number

Let's walk through a real example using Coca-Cola (KO) with data from FY2025 (fiscal year ended December 2025).

Step 1: Find the Earnings Per Share (EPS)

EPS is the company's net profit divided by shares outstanding. Use diluted EPS — this accounts for stock options and convertible securities, giving you a more conservative (and more accurate) number.

Coca-Cola FY2025 diluted EPS: $3.04

Where to find it: The company's income statement, any financial data site like StockAnalysis.com, or our Graham Number Calculator which pulls this automatically.

Step 2: Find the Book Value Per Share (BVPS)

Book value is what shareholders would theoretically own if the company sold all its assets and paid all its debts. Per share, it's total shareholders' equity divided by shares outstanding.

From Coca-Cola's FY2025 balance sheet:

Total Common Shareholders' Equity: $32.17 billion
Shares Outstanding: 4.303 billion

BVPS = $32.17B ÷ 4.303B = $7.46

Step 3: Plug Into the Formula

Graham Number = √(22.5 × EPS × BVPS)
             = √(22.5 × $3.04 × $7.46)
             = √(22.5 × $22.68)
             = √($510.3)
             = $22.59

Step 4: Compare to the Current Price

As of March 23, 2026, Coca-Cola trades at $74.98.

Graham Number: $22.59 Current Price: $74.98 Verdict: Trading at 3.3× its Graham Number

By Graham's formula, KO is significantly overvalued.

Wait — Does That Mean Coca-Cola Is a Bad Stock?

No. And this is the most important lesson in the entire article.

The Graham Number doesn't capture brand value, competitive moats, or future growth. Coca-Cola has:

63 years of consecutive dividend increases (a Dividend King)
Unmatched global distribution in 200+ countries
A brand worth an estimated $90+ billion that shows up nowhere on the balance sheet

Graham developed his formula primarily for asset-heavy, industrial businesses where tangible book value mattered. Companies where factories, equipment, and physical inventory made up most of the value.

Coca-Cola's value is 90% intangible. The formula undershoots it by design.

When Graham Number Works Best

The Graham Number is most reliable for:

Banks and financial companies — Their assets are measurable (loans, securities)
Insurance companies — Book value is a core metric
Industrial manufacturers — Heavy equipment, property, inventory
Utilities — Stable earnings, significant fixed assets

It's least reliable for:

Consumer staple brands with dominant moats (KO, PG, JNJ)
Tech companies with minimal tangible assets
Any company with a negative or near-zero book value

A Stock That Passes the Graham Number Test

To show the other side of the formula, here's an example using Pfizer (PFE) as of March 2026.

From public filings:

FY2025 diluted EPS: $1.36
BVPS (estimated from ~$80B equity / 5.7B shares): ~$14.00

Graham Number = √(22.5 × $1.36 × $14.00)
             = √(22.5 × $19.04)
             = √($428.4)
             = $20.70

Current price: $26.86.

Pfizer is still above its Graham Number ($26.86 vs $20.70), but it's meaningfully closer — trading at about 1.3× Graham, versus Coca-Cola's 3.3×. Pfizer's pharmaceutical assets are more tangible, making the formula more applicable here. This doesn't make it a buy automatically; it means the valuation is in a more reasonable territory for further investigation.

The Most Common Mistakes Beginners Make

Mistake #1: Using Forward EPS Instead of Trailing EPS

Forward EPS is management's estimate of future earnings. Analysts can be wrong, companies can miss guidance, and that "guidance" was issued by the same team that wants the stock to look good. Graham's approach is backward-looking by design — he wanted to value what a company had actually earned, not what it promised to earn.

Always use trailing 12-month (TTM) diluted EPS.

Mistake #2: Treating the Graham Number as a Buy Signal

If a stock is below its Graham Number, that's a necessary condition worth investigating — not a buy signal by itself. You still need to ask:

Is the business fundamentally sound?
Is EPS stable or declining?
What's driving the low book value?
Is there a reason the market is pricing it below Graham's formula?

Markets aren't stupid. If something is deeply below its Graham Number, there's usually a reason.

Mistake #3: Ignoring Tangible Book Value

Total book value can include billions in goodwill and intangible assets — purchased brand names, patents, acquired customer lists. These may be worth something, but they're not the same as physical assets Graham had in mind.

For a more conservative calculation, use tangible book value per share (BVPS minus intangibles and goodwill). For Coca-Cola, FY2025 tangible BVPS is $0.96 — which would make the Graham Number even lower. That number shows you just how brand-driven KO's value really is.

Mistake #4: Using Annual EPS for a Seasonally Lumpy Business

If a company's earnings swing wildly quarter to quarter (retailers, airlines, energy companies), a single year's EPS can misrepresent normalized earning power. Graham himself preferred to average 3-5 years of EPS for volatile businesses.

Mistake #5: Comparing Across Industries

A bank trading at 0.8× book value isn't the same as a tech company trading at 0.8× book value. Context matters. The Graham Number is a starting point for one specific type of business, not a universal ranking system.

The Margin of Safety

Graham's companion concept to intrinsic value was the margin of safety — the gap between a stock's estimated intrinsic value and its current price.

If the Graham Number comes out to $30 and the stock trades at $18, your margin of safety is 40%. That buffer protects you if your inputs were slightly off, the business disappoints, or the market stays irrational longer than expected.

Graham recommended a minimum 33% margin of safety for any investment. Most practitioners think 25-50% is a reasonable range depending on the quality of the business.

Margin of Safety Formula:

Margin of Safety = (Graham Number - Current Price) / Graham Number × 100

If Graham Number = $30, Current Price = $20:

Margin of Safety = ($30 - $20) / $30 × 100 = 33.3%

The Fast Path: Use Our Graham Calculator

Manually running this calculation for every stock you want to evaluate is tedious. You need the most recent EPS, the balance sheet equity, the share count — and you have to make sure you're using the right numbers.

Our Graham Number Calculator does all of this automatically. Enter a ticker symbol, and you'll get:

The Graham Number
Current price vs. Graham Number
Margin of safety percentage
A quick reading on whether the stock is above or below intrinsic value

It won't tell you whether to buy or sell — that's your call. But it gives you the math in seconds instead of minutes.

Quick Reference: Graham Number Cheat Sheet

| Input | Where to Find It | Which Number to Use | |-------|-----------------|---------------------| | EPS | Income statement | Diluted TTM (trailing 12 months) | | BVPS | Balance sheet | Total common equity ÷ diluted shares | | Optional: Tangible BVPS | Balance sheet | Equity minus goodwill & intangibles ÷ shares |

The formula:

Graham Number = √(22.5 × Diluted EPS × BVPS)

KO example (March 2026):

√(22.5 × $3.04 × $7.46) = √$510.3 = $22.59
KO current price: $74.98 → Trading at 3.3× Graham Number

Bottom Line

The Graham Number is one of the most durable tools in value investing — not because it's always right, but because it forces you to think about what a business is actually worth in terms of tangible earnings and book value.

Use it as a first filter, not a final verdict. It works best for asset-heavy businesses. It'll misfire on brand-driven consumer staples and asset-light tech companies. That's not a flaw — it's a feature. It forces you to ask why a stock commands a premium, and whether that premium is justified.

The math is simple. The judgment is the hard part.

All financial data sourced from company filings and StockAnalysis.com. Data as of March 23, 2026. Not investment advice.

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