The Graham Number: Benjamin Graham's Formula for Finding Undervalued Stocks

The Graham Number is a valuation formula developed by Benjamin Graham, widely considered the father of value investing and the mentor of Warren Buffett. It provides a quick estimate of the maximum price a defensive investor should pay for a stock based on two fundamental metrics: earnings per share and book value per share.

While modern approaches like DCF analysis and EV/EBITDA offer more nuanced valuations, the Graham Number remains one of the fastest ways to screen for potentially undervalued stocks. This guide covers the formula, an interactive calculator, a comparison table for popular stocks, real examples, where the formula works best, where it falls short, and how it compares to modern valuation methods.

What Is the Graham Number

The Graham Number is a single number that represents the maximum price Benjamin Graham believed a conservative investor should pay for a stock. If the current stock price is below the Graham Number, the stock passes Graham's basic value screen and may be undervalued. If the stock trades above the Graham Number, it fails the test.

Graham introduced this concept in his landmark books Security Analysis (1934) and The Intelligent Investor (1949). His goal was to give everyday investors a simple, formula-based way to identify stocks trading below their fundamental worth without needing complex financial models.

The Graham Number is not a price target. It is a ceiling. Trading below it means you are paying less than what Graham considered a reasonable maximum based on the company's earnings power and asset base. The wider the gap between the Graham Number and the current price, the larger your margin of safety.

The Graham Number Formula

The Graham Number formula combines two of Graham's core criteria into a single calculation.

The constant 22.5 is not arbitrary. It comes from Graham's belief that a stock should not trade above 15 times earnings (P/E of 15) and 1.5 times book value (P/B of 1.5). Since 15 multiplied by 1.5 equals 22.5, the formula elegantly combines both criteria into a single number.

Both EPS and book value per share must be positive for the formula to work. If either is negative, you cannot take the square root and the formula is undefined. This immediately excludes unprofitable companies and those with negative equity from Graham's screen.

How to Calculate the Graham Number Step by Step

Step one: find the company's earnings per share. Use trailing twelve month (TTM) EPS from the most recent financial statements. Avoid using forward or estimated EPS since Graham's approach is rooted in actual reported data, not projections.

Step two: find the book value per share. This is the company's total shareholder equity divided by the number of outstanding shares. It represents the net asset value that theoretically belongs to shareholders if the company were liquidated.

Step three: multiply EPS by book value per share, then multiply that result by 22.5.

Step four: take the square root of the result. This is the Graham Number — the maximum price Graham would recommend paying.

Step five: compare the Graham Number to the current stock price. If the stock trades below the Graham Number, it passes the screen. The wider the gap, the larger your margin of safety. If the stock trades above, it fails Graham's test.

Graham Number Calculator

Use the calculator below to test any stock. You can find EPS and Book Value Per Share on financial websites or on stock pages at fairpriceindex.com/stocks.

Graham Number for Popular Stocks

Applying the Graham Number to well-known stocks reveals how dramatically modern markets diverge from Graham's conservative framework. Most mega-cap stocks fail the test entirely, which tells us something important about either the formula's limitations or the market's optimism.

The pattern is clear: the Graham Number works best for companies where tangible book value is a significant portion of total value. For asset-light businesses built on intellectual property, brand, and network effects, the formula systematically undervalues the stock because it cannot measure intangible assets.

Two Conditions for Using the Graham Number

Before applying the formula, Graham specified two conditions that must be met for the result to be meaningful.

First, the company must have positive earnings. The formula requires a positive EPS. Companies with negative earnings produce an undefined result since you cannot take the square root of a negative number. This immediately excludes unprofitable startups and turnaround situations.

Second, the company must have positive book value. Some companies, particularly those with massive share buyback programs or accumulated losses, can have negative book value. The formula is meaningless in these cases.

Additionally, the Graham Number works best when the company's P/E ratio is below 15 and its P/B ratio is below 1.5. If either metric significantly exceeds these thresholds, the stock is already outside Graham's comfort zone regardless of what the formula outputs.

Where the Graham Number Works Best

The Graham Number is most reliable for mature, asset-rich businesses in sectors where book value is a meaningful measure of company worth.

Banks and financial institutions are the best candidates because their assets and liabilities are carried at close to market value. The relationship between book value and stock price is direct and meaningful. Utilities with significant physical infrastructure also work well because their tangible assets (power plants, transmission lines, pipelines) represent real value.

Industrial and manufacturing companies with substantial property and equipment are another good fit. Their book value reflects actual productive capacity. Insurance companies where investment portfolios anchor the balance sheet also lend themselves to Graham's framework.

In these sectors, the relationship between earnings, book value, and stock price tends to be more stable and predictable, which is exactly what the Graham Number was designed to evaluate.

Where the Graham Number Falls Short

The formula has several well-known limitations that are especially relevant in today's market.

It ignores growth entirely. A company growing earnings at 30 percent per year is treated identically to one with flat earnings. This makes the Graham Number too conservative for any company where future growth is a significant component of value.

It struggles with asset-light businesses. Technology companies, SaaS platforms, and service businesses often have minimal tangible book value because their worth lies in intellectual property, brand value, network effects, and recurring revenue. The formula dramatically undervalues these companies.

It does not account for debt. A company with high debt may appear to pass the Graham Number test because its book value has not yet reflected the risk. Two companies with identical EPS and book value but vastly different debt loads would produce the same Graham Number, even though one is materially riskier.

It uses backward-looking data only. Both EPS and book value are historical figures. They tell you nothing about whether earnings are accelerating or decelerating, or whether assets are appreciating or deteriorating. For a forward-looking perspective, free cash flow analysis is more appropriate.

Share buybacks distort the formula. Companies that aggressively repurchase shares reduce their book value, which lowers the Graham Number even if the business is thriving. Apple's extremely low Graham Number is largely a result of its buyback program, not any weakness in its business.

Graham Number vs DCF Analysis

The Graham Number and Discounted Cash Flow analysis represent two fundamentally different approaches to valuation. The Graham Number is backward-looking, formula-based, and takes seconds to calculate. DCF is forward-looking, assumption-driven, and requires detailed modeling of future cash flows.

DCF addresses every major limitation of the Graham Number. It incorporates growth expectations, accounts for the time value of money, adjusts for risk through the discount rate, and works for any company with projectable cash flows regardless of book value.

The trade-off is complexity and sensitivity. DCF requires assumptions about growth rates, discount rates, and terminal values. Small changes in these inputs can produce dramatically different results. The Graham Number requires only two inputs and produces a single, deterministic answer.

For most modern investors, DCF is the more appropriate tool. But the Graham Number remains valuable as a quick initial screen, especially for asset-heavy sectors where the formula's assumptions hold true.

Graham Number vs Fair Value

Fair value as calculated by blended models like Fair Price Index incorporates everything the Graham Number misses: growth projections through DCF, peer comparisons through P/E and EV/EBITDA, and market expectations through analyst consensus.

The Graham Number is one dimension of value: what is the maximum price justified by current earnings and current book value? Fair value is multi-dimensional: what is the stock worth considering future cash flows, sector positioning, and expert forecasts?

In practice, a stock can trade above its Graham Number but below its fair value. This is common for growth companies where future earnings potential exceeds what historical numbers suggest. Conversely, a stock can trade below its Graham Number and still be overvalued if the business is deteriorating faster than the backward-looking numbers show.

Fair Price Index uses a blended approach: 50 percent DCF, 30 percent relative valuation, and 20 percent analyst consensus. This captures what the Graham Number misses while still respecting Graham's core principle: never pay more than a business is worth.

Graham's Enduring Principle

Despite its limitations, the philosophy behind the Graham Number remains as relevant as ever. Graham's core message was not about a specific formula. It was about discipline. Know what you are paying. Know what you are getting. Demand a margin of safety between the two.

Whether you use the Graham Number, DCF, or a blended model like Fair Price Index, the goal is the same: never pay more than a business is worth. Explore fair values for over 37,000 stocks at fairpriceindex.com, calculate the Graham Number with the standalone calculator, or test your own valuations with the DCF Calculator.