Graham Number Calculator
Calculate the Graham Number to determine a stock’s intrinsic value using Benjamin Graham’s formula. This conservative valuation metric helps identify potentially undervalued stocks.
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How to Use
- Enter the company’s Earnings Per Share (EPS)
- Input the Book Value Per Share
- Optionally enter the current stock price
- Click calculate to analyze the Graham Number
Note: The Graham Number represents a conservative estimate of a stock’s fair value
Investing in the stock market can be tricky. You need tools to help you find good stocks at fair prices. One such tool is the Graham Number Calculator. It helps investors decide if a stock is undervalued.
In this article, we will explain:
- What the Graham Number is
- Who created it
- How to calculate it
- Why it is useful
- Limitations of the Graham Number
- How to use a Graham Number Calculator
By the end, you will understand how this simple formula can improve your investing decisions.
What Is the Graham Number?
The Graham Number is a formula used to find the fair value of a stock. It helps investors avoid overpaying for a company’s shares. The number gives a maximum price an investor should pay based on earnings and book value.
If a stock’s current price is below the Graham Number, it may be undervalued. If it’s above, the stock may be overpriced.
This method is based on value investing principles. Value investing means buying stocks for less than their true worth.
Who Invented the Graham Number?
The Graham Number was created by Benjamin Graham. He was a famous economist and investor. He is also known as the “Father of Value Investing.”
Benjamin Graham taught Warren Buffett, one of the richest investors in the world. Graham wrote two important books:
- The Intelligent Investor
- Security Analysis
His ideas help investors make smart, low-risk decisions.
How to Calculate the Graham Number
The Graham Number formula is simple. It uses two key financial numbers:
- Earnings Per Share (EPS) – A company’s profit divided by its shares.
- Book Value Per Share (BVPS) – A company’s net assets divided by its shares.
The Graham Number Formula
The formula is:Graham Number=22.5×EPS×BVPSGraham Number=22.5×EPS×BVPS
Where:
- 22.5 is a multiplier based on Graham’s rules.
- EPS is the company’s earnings per share (last 12 months).
- BVPS is the book value per share.
Why 22.5?
Benjamin Graham believed a stock should have:
- A P/E ratio (Price-to-Earnings) below 15.
- A P/B ratio (Price-to-Book) below 1.5.
When you multiply these (15 × 1.5), you get 22.5. This keeps the stock selection conservative.
Step-by-Step Calculation
Let’s calculate the Graham Number for Company XYZ:
- Find EPS – Suppose Company XYZ has an EPS of $5.
- Find BVPS – Suppose its BVPS is $20.
- Multiply EPS and BVPS – 5×20=1005×20=100.
- Multiply by 22.5 – 22.5×100=2,25022.5×100=2,250.
- Take the square root – 2,250=47.432,250
- =47.43.
So, the Graham Number for Company XYZ is $47.43.
If the stock trades below $47.43, it may be a good buy. If it’s above, it may be overvalued.
Why Use the Graham Number?
1. Finds Undervalued Stocks
The Graham Number helps investors find stocks trading below their true value.
2. Simple and Easy to Use
You only need EPS and BVPS, which are easy to find.
3. Reduces Risk
Benjamin Graham focused on safety. His method avoids overpriced stocks.
4. Good for Long-Term Investors
This method works best for investors who hold stocks for years.
Limitations of the Graham Number
No formula is perfect. The Graham Number has some weaknesses:
1. Works Best for Stable Companies
It is best for large, profitable companies. It may not work well for startups or high-growth firms.
2. Ignores Future Growth
The formula uses past earnings, not future potential. A growing company may be worth more than the Graham Number suggests.
3. Not Suitable for All Industries
Banks and tech companies have different financial structures. The Graham Number may not fit them well.
4. Market Conditions Change
Economic factors can affect stock prices. The Graham Number does not account for market trends.
How to Use a Graham Number Calculator
Manually calculating the Graham Number is easy. But using a Graham Number Calculator saves time.
Steps to Use a Graham Number Calculator
- Find EPS and BVPS
- Check financial websites like Yahoo Finance, Bloomberg, or company reports.
- Look for “Earnings Per Share (EPS)” and “Book Value Per Share (BVPS).”
- Enter the Numbers into the Calculator
- Input EPS and BVPS.
- Click “Calculate.”
- Compare with Current Stock Price
- If the stock price is below the Graham Number, it may be a good buy.
- If it’s above, the stock may be overpriced.
Example of a Graham Number Calculator
Many free calculators are available online. Here’s how they work:
| Input | Value |
|---|---|
| EPS (TTM) | $5.00 |
| BVPS | $20.00 |
| Graham Number | $47.43 |
If the stock price is 40∗∗,itisundervalued.Ifit’s∗∗40∗∗,itisundervalued.Ifit’s∗∗60, it may be overvalued.
Best Stocks for the Graham Number Strategy
Not all stocks fit this model. The best stocks for Graham’s formula are:
✅ Profitable companies (consistent earnings)
✅ Low debt (strong balance sheet)
✅ Stable industries (not high-risk sectors)
Examples:
- Blue-chip stocks (e.g., Coca-Cola, Johnson & Johnson)
- Utility companies
- Consumer goods companies
Avoid:
❌ Startups with no earnings
❌ Tech companies with high growth but no profits
❌ Companies with too much debt
Final Thoughts
The Graham Number Calculator is a useful tool for value investors. It helps find stocks trading below their fair value.
However, it should not be the only tool you use. Combine it with other analysis methods for better results.
Key Takeaways
✔ The Graham Number helps estimate a stock’s fair value.
✔ It uses EPS and BVPS to calculate the maximum price to pay.
✔ Stocks trading below the Graham Number may be undervalued.
✔ It works best for stable, profitable companies.
✔ Always do extra research before investing.
By using the Graham Number, you can make smarter, safer investment choices. Try it today and see if your favorite stocks are undervalued!