Benjamin Graham Formula: A Detailed Look for Value-Focused Investors
The Benjamin Graham formula is a stock valuation tool that calculates a price ceiling based on earnings per share and book value per share. It gives you a single number, the Graham Number, and says: if the stock trades below this number, it passes the basic value screen. The formula is the square root of (22.5 multiplied by EPS multiplied by BVPS). The constant 22.5 comes from Graham's original criteria of a P/E no higher than 15 and a P/B no higher than 1.5, since 15 times 1.5 equals 22.5.
Graham published the criteria behind this formula in "The Intelligent Investor" in 1949. He never stated it as a single equation, but later analysts, particularly Benjamin Graham's students and followers, formalized the calculation into what is now called the Graham Number. The formula is blunt by design. Graham believed that excessive precision in valuation was itself a form of speculation.
Key Takeaways
- The Graham Number formula is: square root of (22.5 x EPS x BVPS). A stock trading below this number passes Graham's basic price screen.
- The constant 22.5 reflects Graham's original limits: P/E no higher than 15 and P/B no higher than 1.5, since 15 x 1.5 = 22.5.
- The formula works best on stable, asset-heavy businesses with consistent earnings. It understates value for high-ROIC compounders like Apple (AAPL), where intangible assets inflate EPS relative to book value.
- Graham's original broader screens covered current ratio, debt levels, earnings stability, and dividend history, not just price relative to the Graham Number.
- The formula is an initial filter, not a final verdict. A stock passing the Graham Number screen still requires analysis of competitive position, management quality, and balance sheet health.
- Our screener lets you run Graham Number screens across the market alongside 120 other fundamental metrics simultaneously.
The Benjamin Graham Formula in Detail
The full formula is:
Graham Number = square root of (22.5 x EPS x BVPS)
Where:
- EPS = trailing twelve-month earnings per share (use normalized EPS, not a one-year spike)
- BVPS = book value per share (tangible book preferred; exclude goodwill if it dominates)
- 22.5 = the product of Graham's P/E limit (15) and P/B limit (1.5)
Example: A company earns $8.00 per share and has a book value of $60.00 per share.
Graham Number = square root of (22.5 x 8 x 60) = square root of (10,800) = approximately $103.92
If the stock trades at $78, it is trading at a 25% discount to the Graham Number. That passes the screen.
If the stock trades at $130, it trades at a 25% premium to the Graham Number. That fails.
The formula produces a price ceiling, not a price target. Trading below the Graham Number means the stock is cheap by this specific measure. It does not mean the stock will rise.
Why the Constant 22.5 Matters
Graham's original criteria in "The Intelligent Investor" required that:
- The P/E ratio should not exceed 15
- The P/B ratio should not exceed 1.5
- The product of P/E and P/B should not exceed 22.5
The third criterion is the binding constraint. A stock with a P/E of 10 and a P/B of 2.2 has a product of 22, which passes. A stock with a P/E of 14 and a P/B of 1.6 has a product of 22.4, which also passes. A stock with a P/E of 15 and a P/B of 1.8 has a product of 27, which fails despite both individual metrics looking acceptable in isolation.
The product constraint prevents a company from slipping through the screen by being only slightly expensive on one metric while being significantly expensive on the other. It is a more conservative filter than applying the two criteria independently.
The Graham Growth Formula: A Different Calculation
Graham also published a growth-adjusted valuation formula in the 1962 edition of "Security Analysis." This formula is distinct from the Graham Number and is often confused with it.
The formula is: Intrinsic Value = EPS x (8.5 + 2G)
Where G is the expected annual earnings growth rate for the next 7-10 years.
For a company with EPS of $10 growing at 7% per year: Intrinsic Value = 10 x (8.5 + 2 x 7) = 10 x 22.5 = $225 per share
Graham updated this formula in later editions with an interest rate adjustment: multiply the result by (4.4 / current AAA bond yield). When bond yields were 4.4%, no adjustment was needed. When yields are higher, the multiplier reduces the intrinsic value. When yields are lower, it increases it.
The growth formula is more useful for modern markets, where most businesses carry intangible assets that inflate earnings relative to book value. The Graham Number struggles with asset-light businesses. The growth formula handles them better.
Applying the Formulas to Real Stocks
Running the Graham Number against well-known stocks in April 2026 illustrates both its power and its limits.
| Company | EPS (TTM) | BVPS | Graham Number | Stock Price | Premium/Discount |
|---|---|---|---|---|---|
| BRK.B (Berkshire B) | $22.10 | $198.00 | $313.80 | ~$470 | +50% premium |
| JNJ (Johnson & Johnson) | $9.30 | $28.00 | $76.64 | ~$156 | +104% premium |
| KO (Coca-Cola) | $2.75 | $6.40 | $19.92 | ~$68 | +241% premium |
| AAPL (Apple) | $6.97 | $4.40 | $26.27 | ~$218 | +730% premium |
| MSFT (Microsoft) | $13.10 | $38.90 | $107.14 | ~$410 | +283% premium |
Every major U.S. blue chip fails the Graham Number today. This is not surprising. Graham built the formula in a market where stocks routinely traded below book value following two major crashes. In a low-rate, high-ROIC environment, asset-light businesses with durable competitive advantages rationally trade at large premiums to book.
What this table illustrates is that the Graham Number is most useful when screening smaller, less-followed companies where market inefficiency is more likely. Among Russell 2000 industrials and small-cap financials, there are companies passing the Graham Number today.
The Current Ratio Formula in Graham's System
Graham placed heavy emphasis on liquidity. His standard for defensive investors required a current ratio above 2.0, meaning current assets at least twice current liabilities. He wrote that a company should be able to pay off all its short-term obligations and still have enough working capital left to operate.
The current ratio formula is: Current Assets / Current Liabilities
A ratio of 2.0 means for every dollar of short-term debt, the company has two dollars in cash, receivables, and inventory to cover it. Graham's threshold of 2.0 is conservative by most modern standards, where a 1.5 current ratio is generally considered adequate.
For industrial and manufacturing businesses, Graham also required that long-term debt not exceed working capital (current assets minus current liabilities). This ensured the company could theoretically retire its long-term debt from its own operating capital, a rare standard in leveraged modern balance sheets.
The Quick Ratio and Net Working Capital in Graham's Screens
The quick ratio refines the current ratio by removing inventory, which is the least liquid current asset. The quick ratio formula is: (Cash + Short-term Investments + Receivables) / Current Liabilities.
Graham preferred the current ratio as his primary liquidity metric but referenced the quick ratio for companies with large or slow-moving inventory, such as retailers and manufacturers. A quick ratio below 1.0 was a warning sign regardless of the current ratio.
Net working capital (NWC) is current assets minus current liabilities. Graham's net-net screen required that the market capitalization of a company be below its net current asset value, which is net working capital minus all non-current liabilities. A company with $50 million in NWC, $10 million in long-term debt, and a market cap of $30 million was a textbook net-net candidate.
| Liquidity Metric | Graham's Threshold | How to Calculate |
|---|---|---|
| Current Ratio | Above 2.0x | Current Assets / Current Liabilities |
| Quick Ratio | Above 1.0x (implied) | (Cash + Investments + Receivables) / Current Liabilities |
| Net Working Capital | Positive and growing | Current Assets - Current Liabilities |
| Net Current Asset Value | Above market cap (net-net) | NWC - Long-term Debt - Preferred Stock |
When Graham's Formula Understates and Overstates Value
The Graham Number systematically understates value for high-quality compounders. Apple (AAPL) earns a 45.1% ROIC on tangible capital but carries relatively low book value because retained earnings have been returned to shareholders through buybacks. The Graham Number of $26.27 is absurd for a business generating $6.97 in EPS. The growth formula is more appropriate here.
The Graham Number systematically overstates value for distressed businesses with large book values but declining earnings. A bank trading at 0.5x book during a credit cycle looks attractive on the Graham Number screen but may have hidden losses embedded in the loan book that will wipe out that book value. Graham understood this risk and paired his asset screens with earnings stability requirements.
The formula performs best in its original target market: stable industrial, consumer, and financial businesses with tangible assets, predictable earnings, and no particular competitive moat. For these businesses in 2026, the formula still works as a filter.
Further reading: SEC EDGAR · Investopedia
Why graham number Matters
This section anchors the discussion on graham number. The detailed treatment, formula, and worked examples appear in the body of this article above. The points below summarize the most important takeaways for value investors who want to apply graham number in real portfolio decisions. ValueMarkers exposes the underlying data on every covered ticker via the screener and stock profile pages, so the concepts in this article translate directly into actionable filters.
Key inputs for graham number
See the main discussion of graham number in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using graham number alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for graham number
See the main discussion of graham number in the sections above for the full treatment, including the inputs, the calculation methodology, the typical sector benchmarks, and the most common pitfalls to avoid. The ValueMarkers screener lets value investors filter the full universe of 100,000+ stocks across 73 exchanges using graham number alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- Graham Number — Graham Number captures how cheaply a stock trades relative to its fundamentals
- Pb Ratio — Glossary entry for Pb Ratio
- Earnings Yield — Earnings Yield is the metric used to how cheaply a stock trades relative to its fundamentals
- Benjamin Graham — related ValueMarkers analysis
- Intelligent Investing Benjamin Graham — related ValueMarkers analysis
- How Is Stock Market Works — related ValueMarkers analysis
Frequently Asked Questions
what is financial leverage ratio formula
The financial leverage ratio measures how much of a company's assets are financed by debt relative to equity. The basic formula is Total Assets / Total Shareholders' Equity. A ratio of 2.0 means half the assets are financed by debt. Graham preferred low leverage and screened out companies where long-term debt exceeded working capital, which typically correlates with leverage ratios above 3.0x for most business types.
what is the formula for stock valuation
There are several stock valuation formulas, each suited to different situations. Graham's Number uses square root of (22.5 x EPS x BVPS). The dividend discount model uses Dividend / (Required Return - Growth Rate). The DCF model discounts projected free cash flows at the weighted average cost of capital. Graham preferred asset-based and earnings-power approaches over growth-dependent models because they required fewer assumptions about the uncertain future.
howard graham buffett net worth
Howard Graham Buffett, Warren Buffett's son, has an estimated net worth of approximately $2 billion, primarily in Berkshire Hathaway shares. His middle name "Graham" honors Benjamin Graham, Warren Buffett's professor and mentor at Columbia Business School. Howard's career has focused on agriculture, philanthropy, and global food security rather than investing.
what is the formula for the current ratio
The current ratio formula is Current Assets divided by Current Liabilities. A ratio of 2.0, Graham's minimum for defensive investors, means a company has two dollars in short-term assets for every dollar in short-term obligations. Current assets typically include cash, receivables, and inventory. Current liabilities include accounts payable, short-term debt, and accrued expenses.
what is the formula for quick ratio
The quick ratio formula is (Cash + Short-term Investments + Accounts Receivable) divided by Current Liabilities. It excludes inventory because inventory takes time to convert to cash. A quick ratio below 1.0 signals potential liquidity stress. Graham used the quick ratio as a secondary check on companies with large inventory balances, particularly in retail and manufacturing.
what is net working capital formula
Net working capital (NWC) equals Current Assets minus Current Liabilities. It measures the short-term operational liquidity cushion of a business. Graham used a stricter version called net current asset value (NCAV): Current Assets minus All Liabilities (both current and non-current). Companies trading below 2/3 of their NCAV were his ideal candidates, trading below even a conservative liquidation estimate.
The Benjamin Graham formula is a starting point, not a destination. Use the Graham Number to filter candidates, then examine their earnings stability, debt levels, competitive position, and management track record before committing capital. The formula finds the candidates. The analysis finds the investments.
Run Graham-style screens on over 5,000 U.S. and international equities using our screener, which tracks 120 fundamental indicators including the Graham Number, current ratio, and earnings yield for every company in the database.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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