Graham Number Calculator
Print
Developed by Benjamin Graham—the father of value investing and mentor to Warren Buffett—the Graham Number serves as a defensive upper bound on the price a value investor should pay for a stock. By setting strict upper limits on both price-to-earnings (P/E) and price-to-book (P/B) ratios, it identifies fundamentally sound companies trading at attractive prices.
Our free Graham Number Calculator computes the maximum theoretical fair value price for defensive stocks based on reported Earnings Per Share (EPS) and Book Value Per Share (BVPS).
How to Calculate the Graham Number
Benjamin Graham posited that a defensive investor should not pay more than 15 times earnings or 1.5 times book value. Combining these rule-of-thumb limits yields the famous 22.5 multiplier (15 × 1.5 = 22.5).
The Graham Number Formula:
Graham Number = √( 22.5 × EPS × BVPS )
- EPS: Trailing Twelve Month (TTM) Earnings Per Share.
- BVPS: Most recent Book Value Per Share (Total Tangible Equity / Shares).
- 22.5: Graham’s constant product of maximum P/E (15.0) and maximum P/B (1.50).
Step-by-Step Value Screening Example
Suppose a defensive industrial firm reports Earnings Per Share (EPS) of $4.00 and a Book Value Per Share (BVPS) of $25.00. The stock currently trades on the open market at $35.00 per share.
Let’s calculate the Graham Number maximum fair value price:
Inside Product = 22.5 × $4.00 × $25.00 = 22.5 × 100 = 2,250
Graham Number = √( 2,250 ) = $47.43 per share
| Valuation Variable | Reported Financial Input | Graham Limit Benchmark | Valuation Assessment |
|---|---|---|---|
| Earnings Per Share (EPS) | $4.00 / share | Max P/E = 15.0x ($60.00 max) | Solid earnings productivity |
| Book Value Per Share (BVPS) | $25.00 / share | Max P/B = 1.50x ($37.50 max) | Substantial tangible asset backing |
| Graham Number (Cap Price) | $47.43 Fair Value Cap | Maximum Purchase Threshold | Intrinsic Value Ceiling |
| Current Market Price | $35.00 / share | 26.2% Below Graham Cap | Undervalued / Attractive Buying Target |
Frequently Asked Questions (FAQ)
Where does the 22.5 constant in the Graham Number formula come from?
The constant 22.5 comes directly from Benjamin Graham’s criteria outlined in The Intelligent Investor. Graham recommended that a stock’s P/E ratio should not exceed 15.0 and its P/B ratio should not exceed 1.5. Multiplying 15.0 × 1.5 = 22.5.
Can the Graham Number be used for high-growth tech stocks?
No. The Graham Number is designed specifically for mature, asset-heavy industrial, utility, and banking stocks. Modern software and tech companies have minimal tangible book value and reinvest capital for rapid growth, causing them to routinely trade far above their Graham Number.
What is the difference between Graham Number and Intrinsic Value?
The Graham Number represents a strict upper price limit for conservative buying based solely on current tangible assets and earnings. Intrinsic Value models like Discounted Cash Flow (DCF) project multi-year future cash flow growth.