What is Graham Number?
The Graham Number is a conservative upper bound on fair value developed by Benjamin Graham, the father of value investing. It combines two measures of cheapness (a low P/E (≤15) and a low P/B (≤1.5)) into a single per-share price ceiling. Any stock trading below its Graham Number satisfies both criteria simultaneously and is considered potentially undervalued by Graham's standards. It works best for mature, profitable companies with consistent earnings and tangible book value. Asset-light companies, negative-earnings firms, and high-growth tech stocks routinely trade well above their Graham Number, which reflects the model's conservative 1949-era assumptions.
Formula
Graham Number = √(22.5 × EPS × Book Value per Share)
22.5 = 15 (max P/E) × 1.5 (max P/B)
EPS = Diluted earnings per share (TTM)
Book Value per Share = Shareholders' equity / shares outstanding
Calculator
How to Use
- 1Get diluted EPS: Use the last 12 months of diluted EPS from the income statement. Must be positive.
- 2Get book value per share: Shareholders' equity divided by diluted shares outstanding.
- 3Multiply by 22.5: 22.5 × EPS × BVPS gives the value under the square root.
- 4Take the square root: The result is Graham's maximum fair price per share. Compare to the current market price.
Worked Example
Example: Consumer staples company
EPS
$4.00
Book Value/Share
$20.00
Graham Number = √(22.5 × 4 × 20) = √1,800 = $42.43. If the stock trades at $38, it is below the Graham Number, and potentially undervalued by Graham's criteria. At $55, it trades at a 30% premium to the ceiling and would not meet Graham's strict value criteria.
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