What Is the Graham Number? A Beginner's Guide to Stock Valuation

The Graham Number is one of the most important tools in a value investor's toolkit. Named after Benjamin Graham — the father of value investing and mentor to Warren Buffett — this formula gives you a quick way to determine the maximum price you should pay for a stock.

The Formula

The Graham Number is calculated as:

Graham Number = √(22.5 × EPS × BVPS)

Where:

• EPS = Earnings Per Share (trailing twelve months)
• BVPS = Book Value Per Share

The constant 22.5 comes from Graham's belief that a stock's P/E ratio should not exceed 15 and its P/B ratio should not exceed 1.5 (15 × 1.5 = 22.5).

Why It Works

Graham's genius was in recognizing that a stock's true value is rooted in two fundamental things:

1. How much the company earns (EPS)
2. How much the company owns (Book Value)

If a stock is trading below its Graham Number, it may be undervalued. The gap between the market price and the Graham Number is your margin of safety.

A Real Example

Let's say Company XYZ has:

• EPS of $5.00
• Book Value Per Share of $30.00

Graham Number = √(22.5 × 5.00 × 30.00) = √(3,375) = $58.09

If XYZ is trading at $42, you have a margin of safety of about 28%. That's a potential value buy.

Limitations

The Graham Number isn't perfect. It doesn't account for:

• Future growth potential
• Industry-specific factors
• Management quality
• Competitive advantages (moats)

That's why we use it as a starting point, not the final answer. We combine the Graham Number with other analyses — dividend history, debt levels, earnings consistency — to make our recommendations.

How We Use It

At Poor Man's Stocks, the Graham Number is the first filter in our screening process. Every stock in our Stock Screener has been evaluated using this formula, plus additional Graham criteria:

• Current ratio > 2.0
• Positive earnings in each of the past 5 years
• Dividend payments for at least 5 consecutive years
• Earnings growth of at least 33% over 10 years
• P/E ratio under 15
• P/B ratio under 1.5

This rigorous screening is what separates value investing from gambling.

Start Using It Today

You don't need expensive software to calculate the Graham Number. The data is freely available on sites like Yahoo Finance or Finviz. Pick any stock, plug in the numbers, and compare the result to the current market price.

If the market price is significantly below the Graham Number — you might have found a bargain.