What Is the Graham Number and Why Value Investors Love It
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Meta description: The Graham Number is a simple but powerful valuation formula from Benjamin Graham. Learn what it is, how to calculate it, and how to use it to find undervalued stocks.
If DCF models are the thoroughbred of stock valuation, the Graham Number is the reliable workhorse. It's fast, simple, and grounded in decades of investing wisdom. And it still works.
Benjamin Graham — the father of value investing and Warren Buffett's mentor — developed this formula as a quick screen to identify stocks trading below their intrinsic worth. Over 70 years later, it remains one of the most widely used tools in a value investor's kit.
Here's everything you need to know.
What Is the Graham Number?
The Graham Number is a conservative estimate of a stock's maximum fair value, based on two fundamental metrics: earnings per share (EPS) and book value per share (BVPS).
The formula:
Graham Number = √(22.5 × EPS × BVPS)
The 22.5 multiplier comes from Graham's own guidelines: a stock should trade at no more than 15× earnings and no more than 1.5× book value. Multiply those two caps together: 15 × 1.5 = 22.5.
The result is a single dollar figure — the price above which Graham considered a stock too expensive to buy with a margin of safety.
Why It Works
The Graham Number is built on a simple truth: price matters.
Doesn't matter how great a business is — if you overpay, your returns suffer. Graham's formula encodes two of the most fundamental measures of value:
- EPS reflects profitability. A company earning more per share has more to give back to shareholders.
- Book value per share reflects the net assets behind each share. It's a floor — in theory, what you'd get if the company liquidated.
Together, they give you a blended view of both earnings power and balance sheet strength. It's not perfect, but it's rigorous and fast.
How to Calculate the Graham Number (Example)
Let's say a company has:
- EPS: $4.50
- Book value per share: $28.00
Graham Number = √(22.5 × 4.50 × 28.00)
= √(22.5 × 126)
= √2,835
= $53.24
If the stock is trading at $40, it's below the Graham Number — potentially undervalued. If it's trading at $80, it's well above — proceed with caution.
How Value Investors Use It
The Graham Number isn't a buy signal on its own. It's a filter.
Here's how smart investors put it to work:
- Screening phase: Run the Graham Number across hundreds of stocks to find those trading at a discount. This narrows a universe of 5,000+ stocks down to a manageable watchlist.
- Deeper analysis: Once you've identified candidates, dig into the business quality, competitive moat, debt levels, and growth trajectory.
- Margin of safety: Graham himself suggested buying at a meaningful discount — ideally 20–30% below the Graham Number. The gap between price and value is your cushion against being wrong.
The formula cuts through the noise. In a market full of hype, momentum, and narrative, it anchors you to the numbers.
Where the Graham Number Falls Short
No valuation tool is universal. The Graham Number has real limitations:
- It doesn't account for growth. A high-growth company like a tech platform might look expensive against its Graham Number but still be a great investment.
- Negative EPS or BVPS breaks the formula. If a company has a loss or negative book value, the calculation doesn't work.
- Asset-light businesses look misleading. Companies that earn a lot but hold few hard assets (think software companies) will show low book values — making the Graham Number unrealistically pessimistic.
For these reasons, the Graham Number works best with:
- Banks and financial companies (where book value is highly meaningful)
- Industrial and manufacturing businesses
- Dividend-paying, established companies
- Ben Graham-style net-net screens where you want to find genuinely cheap, asset-backed stocks
Graham Number vs. Other Valuation Methods
| Method | Best For | Complexity |
|---|---|---|
| Graham Number | Quick screen, value stocks | Very low |
| P/E Ratio | Earnings-focused comparison | Low |
| DCF Model | Intrinsic value, full analysis | Medium–High |
| EV/EBITDA | Business value comparison | Medium |
| DDM | Dividend-paying stocks | Medium |
The Graham Number shines as a first pass. Use it alongside a DCF or EV/EBITDA analysis for a more complete picture.
Find Stocks Trading Below Their Graham Number
Calculating Graham Numbers one by one is tedious. Elite Stock Research computes the Graham Number automatically for every US-listed stock — updated with the latest financial data from SEC EDGAR filings.
You can see the Graham Number for any ticker, compare it to the current price, and instantly see the premium or discount.
→ Explore Graham Number valuations free at elitestockresearch.com
Screen for stocks trading below their Graham Number, then dig deeper with DCF models and full financial statements — all in one place, no subscription needed.
Value investing starts here.