How to Calculate the Graham Number (and Find Undervalued Stocks)

Benjamin Graham's formula has helped value investors identify undervalued stocks for over 70 years — and it still works today. The man who mentored Warren Buffett developed a deceptively simple equation that strips away market noise and asks one question: what is this stock actually worth?

That number is called the Graham Number, and once you understand it, you'll never look at a stock price the same way.

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What Is the Graham Number?

The Graham Number is a measure of a stock's intrinsic value — the "true" price a stock should trade at, based on its earnings and assets, not market hype. It was developed by Benjamin Graham, the father of value investing and author of The Intelligent Investor.

The idea behind it is simple: a stock trading below its Graham Number is potentially undervalued. A stock trading above it deserves serious scrutiny before you buy.

The Formula

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

Let's break that down:

• EPS = Earnings Per Share (the company's profit divided by shares outstanding)
• Book Value Per Share = the company's net assets divided by shares outstanding
• 22.5 = the magic multiplier Graham used (it comes from his rule that a stock shouldn't trade at more than 15× earnings or 1.5× book value; 15 × 1.5 = 22.5)

The result is the maximum price Graham believed you should pay for a stock while preserving a meaningful margin of safety.

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Why It Matters for Value Investing

Most retail investors pick stocks based on gut feeling, news headlines, or what's trending on social media. Benjamin Graham took the opposite approach: he wanted math, not emotion.

The Graham Number gives you an objective anchor. When a stock's price is significantly below its Graham Number, you have a built-in cushion — what Graham called the margin of safety. That cushion is your protection against being wrong.

This principle is the foundation of value investing. It's also the subject of Chapter 3 in Micro Moves, Macro Gains — grab it on Amazon if you want the full framework.

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Step-by-Step Calculation: Real Example

Let's use Johnson & Johnson (JNJ) as an example (data approximate for illustration):

• EPS: $9.98
• Book Value Per Share: $25.40

Step 1: Multiply EPS × Book Value Per Share

9.98 × 25.40 = 253.49

Step 2: Multiply by 22.5

253.49 × 22.5 = 5,703.57

Step 3: Take the square root

√5,703.57 ≈ $75.52

So the Graham Number for JNJ (with these figures) is approximately $75.52.

If JNJ is trading at $145, it's trading at nearly 2× its Graham Number — which doesn't automatically make it a bad investment, but it does mean you're paying a significant premium over Graham's intrinsic value benchmark.

Now compare that to a company trading at $60 with a Graham Number of $95. That's a potential 37% discount to intrinsic value — the kind of margin of safety Graham loved.

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Common Mistakes Investors Make

1. Treating the Graham Number as gospel The formula was designed in the 1970s. It works best for stable, profitable companies — not high-growth tech stocks with minimal earnings or book value.

2. Using trailing EPS without checking consistency If a company had a one-time windfall last year, its EPS looks great — but the Graham Number will be inflated. Always check 3–5 years of earnings history.

3. Ignoring debt A company can have solid EPS and book value while drowning in debt. The Graham Number doesn't capture leverage. Always check the debt-to-equity ratio alongside it.

4. Confusing book value with real asset value Intangible assets, goodwill, and accounting adjustments can distort book value significantly. For financial companies especially, this needs careful scrutiny.

5. Skipping the margin of safety Graham didn't just want to buy at fair value — he wanted to buy below it. Most serious value investors require at least a 20–30% discount to the Graham Number before pulling the trigger.

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Use Our Free Graham Number Calculator

Doing this math for one stock takes five minutes. Doing it for a hundred stocks takes all day.

That's why we built the Graham Number Calculator at valueofstock.com/tools/graham-number — plug in any EPS and book value, and get the Graham Number instantly. No login. No spreadsheet. No guessing.

Better yet, our Stock Screener already has the Graham Number pre-calculated for 100+ stocks. You can sort the entire list by the gap between current price and Graham Number — finding the most undervalued stocks in seconds.

Here's how to use it:

1. Go to valueofstock.com/screener
2. Sort by "Graham Number vs. Price" column
3. Stocks trading below their Graham Number will surface immediately
4. Click any ticker to see the full breakdown, including EPS and book value used in the calculation

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When NOT to Rely on the Graham Number Alone

The Graham Number is a starting point, not a finish line. Here's when to be cautious:

• Technology companies: Most big tech firms trade at huge premiums to book value — that doesn't make them bad investments, it just means Graham's formula undervalues their earning potential
• Negative book value: Companies with buybacks or large debt can have negative book value, which breaks the formula entirely
• Cyclical industries: Mining, energy, and auto companies have earnings that swing wildly by year — a single-year EPS snapshot can mislead
• High-growth companies: Graham's approach trades growth for safety; if you're buying a compounder, other valuation methods (DCF, PEG ratio) are more appropriate

Think of the Graham Number as one instrument in a cockpit — useful, but you wouldn't fly blind with just one gauge.

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The Bottom Line

The Graham Number is one of the most powerful, battle-tested tools in stock valuation. It forces you to anchor your thinking to fundamentals — earnings and assets — rather than momentum or narrative.

Benjamin Graham built this formula to protect ordinary investors from overpaying. Seventy years later, it still does exactly that.

Try the Graham Number Calculator free. No login required. Then check it across 100+ stocks on our screener — and see which ones the market might be undervaluing right now.

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This post is for educational purposes only and is not personalized financial advice. Always do your own research before making investment decisions.

Want to go deeper? Chapter 3 of Micro Moves, Macro Gains walks through how to combine the Graham Number with other value signals to build a repeatable stock-picking framework.