Benjamin Graham Stock Valuation Formula by the Numbers: A Data Analysis for Investors
The benjamin graham stock valuation formula translates Graham's investment discipline into a number you can compare to the current stock price. The formula is square root of (22.5 times earnings per share times book value per share), and the result is the maximum price a defensive investor should pay. Understanding why the formula is built this way, and where it produces reliable signals versus misleading ones, is the analytical foundation for applying it correctly.
This data analysis runs the numbers.
Key Takeaways
- The benjamin graham stock valuation formula produces a price ceiling, not a buy signal. Trading below the Graham Number is necessary but not sufficient for a good investment.
- The 22.5 multiplier comes from Graham's combined criterion: P/E no greater than 15 times P/B no greater than 1.5, which equals 22.5.
- The formula works best for asset-heavy, cyclically stable businesses. It systematically undervalues asset-light businesses with durable intangible moats.
- Berkshire Hathaway (BRK.B) at P/E 9.8 and P/B 1.5 is within the range the formula describes. Apple (AAPL) at P/E 28.3 and ROIC 45.1% is outside it and correctly priced by different methods.
- Margin of safety is the principle beneath the formula. The formula is the method; the principle survives even when the formula needs adjustment.
- The formula requires normalized earnings to handle cyclical businesses, because a peak-cycle EPS produces a misleadingly high Graham Number.
The Formula Dissected
Graham set two separate price limits for his defensive investor in "The Intelligent Investor." The first was a maximum price-to-earnings ratio of 15. The second was a maximum price-to-book ratio of 1.5. He then observed that if both limits applied simultaneously, the combined constraint was that the product of the two ratios should not exceed 22.5.
Mathematically:
P/E x P/B = (Price/EPS) x (Price/Book) = Price squared / (EPS x Book) = 22.5
Solving for Price:
Price = square root of (22.5 x EPS x Book Value Per Share)
This derivation reveals something important: the Graham Number is not a discount-rate model. It does not project future cash flows or adjust for the time value of money. It is a static constraint on how much of a premium over current earnings power and current net asset value an investor should pay. It is deliberately simple because Graham thought precision was false comfort in a world where future earnings are uncertain.
Normalized EPS: The Critical Input
The biggest practical mistake in applying the benjamin graham stock valuation formula is using trailing twelve-month EPS from a peak-cycle year. For cyclical businesses, this produces a Graham Number that is far too high during expansions and far too low during recessions.
Graham's solution was to use average earnings over a ten-year period. This is sometimes called "normalized EPS" or "mid-cycle EPS." For a steel company that earns $8 in a strong cycle and $1 in a downturn, the trailing P/E of 10x at the peak looks cheap. But normalized earnings of $4 per share produce a much more cautious Graham Number.
| Input Scenario | EPS Used | Book Value/Share | Graham Number | Market Signal |
|---|---|---|---|---|
| Peak-cycle EPS (steel) | $8.00 | $40.00 | $120 | Looks cheap at $95 |
| Normalized EPS (steel) | $4.00 | $40.00 | $85 | Looks rich at $95 |
| Trough EPS (steel) | $1.50 | $40.00 | $52 | Deep discount misleads |
| 10-year average EPS | $4.00 | $40.00 | $85 | Correct signal |
The table shows why normalization matters. The same stock at the same price looks cheap, rich, or very cheap depending solely on which earnings figure you use. Graham's ten-year average EPS requirement was a methodological safeguard against this error.
What the Formula Finds in Today's Market
Applying the formula across the broad U.S. market in early 2026 produces results concentrated in a specific segment: financial services, industrials, and energy businesses where tangible assets dominate the balance sheet and earnings have normalized across multiple cycles.
The businesses that clear the formula are not, as a rule, the ones generating the headlines. They tend to be slower-growing, higher-yielding, less-covered names. This is by design. Graham built the formula to find businesses that were definitively not expensive, not businesses that were definitively outstanding.
Berkshire Hathaway (BRK.B) is the most prominent large-cap business in proximity to the Graham Number. Its P/E of 9.8 reflects the mixed accounting of an insurance-industrial-investment conglomerate. Its P/B of 1.5 sits exactly at Graham's 1.5x limit. The product of 9.8 x 1.5 = 14.7 is inside the 22.5 ceiling. BRK.B clears the formula.
The contrast: Microsoft (MSFT) at P/E 32.1 and ROIC 35.2% fails the formula by a wide margin. The Graham Number for MSFT would be approximately $106 based on current EPS and book value, versus a market price near $425. This is not evidence that MSFT is overpriced; it is evidence that the formula's domain does not include asset-light, high-ROIC businesses where intangible assets generate returns that book value accounting ignores.
Graham's Criteria as a Checklist
The Graham Number is one element of a broader set of criteria Graham described for defensive investors. Applying the formula without the rest of the checklist misses most of the framework.
The full defensive investor criteria Graham specified in "The Intelligent Investor" include:
- Size: annual revenue above $100 million (1970s dollars; adjust upward for inflation).
- Financial strength: current ratio above 2:1 and long-term debt not exceeding net current assets.
- Earnings stability: no deficit in the past ten years.
- Dividend record: uninterrupted payments for at least 20 years.
- Earnings growth: per-share earnings at least one-third higher in the most recent three-year average versus ten years prior.
- P/E: no more than 15 times average earnings of the past three years.
- Price-to-book: no more than 1.5 times net asset value.
The formula captures the last two criteria in a single number. The rest require checking the financial history. A business that passes the Graham Number but has cut its dividend, carried negative earnings in the last decade, or sports a current ratio below 1.0 is not a Graham investment.
The Role of Margin of Safety
Graham described the margin of safety as the central concept of investment. Every other principle is in service of it. The formula generates a ceiling; the margin of safety is the gap between that ceiling and the actual purchase price.
Graham preferred a 33% margin of safety for most defensive investments. This means a stock with a Graham Number of $50 should be purchased at $33.50 or lower. A stock at $48, just inside the ceiling, carries almost no margin of safety against errors in the EPS or book value estimates.
Coca-Cola (KO) at its current yield of 3.0% and P/E of 23.7 does not pass Graham's formula on the P/E criterion alone, which is 15x. But the 60+ year dividend record passes his continuity test, and the earnings consistency over decades passes his stability test. Investors who apply Graham's principles rather than only his formula might accept a smaller margin of safety on the quantitative side in exchange for the qualitative evidence of durability.
Johnson & Johnson (JNJ) at P/E 15.4 and yield 3.1% sits exactly at Graham's P/E limit. Its earnings record across decades, including through multiple recessions, passes the stability test. Its dividend history passes the continuity test. The book value calculation determines whether the full Graham Number test is met.
The Stock Market Schedule and Formula Application
One practical note: the benjamin graham stock valuation formula should be computed using year-end or quarter-end book value and trailing four-quarter EPS, not intraday prices. Market hours affect when you can transact; they do not affect the underlying calculation.
For long-term value investors applying Graham's framework, the decision to buy is made independently of market timing. Graham's entire system is premised on not being influenced by short-term price movements. The formula is an input to a buy decision that may take weeks or months to execute at the right price.
Applying the Formula with ValueMarkers Tools
The ValueMarkers screener tracks both P/E and P/B across 120+ indicators, with the ability to filter for stocks where the combined P/E x P/B product falls below 22.5. This directly implements the constraint behind the benjamin graham stock valuation formula without requiring manual calculation for each candidate.
The VMCI Score's Value pillar at 35% of the total score incorporates relative P/E and P/B ratios, which means high-scoring businesses on the Value pillar tend to cluster near or inside the Graham Number boundary. The Quality pillar at 30% then separates businesses that are cheap because they are genuinely good businesses from businesses that are cheap because they are deteriorating.
Our guru tracker also shows positions of value investors who have applied Graham-style price discipline over their careers, providing a real-time view of which businesses currently meet these criteria in the hands of experienced practitioners.
Further reading: SEC EDGAR · Investopedia
Why graham number formula stocks Matters
This section anchors the discussion on graham number formula stocks. 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 formula stocks 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 formula stocks
See the main discussion of graham number formula stocks 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 formula stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for graham number formula stocks
See the main discussion of graham number formula stocks 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 formula stocks alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Related ValueMarkers Resources
- DCF Intrinsic Value — DCF captures how cheaply a stock trades relative to its fundamentals
- Margin of Safety — Margin of Safety expresses how cheaply a stock trades relative to its fundamentals
- Graham Number — Graham Number captures how cheaply a stock trades relative to its fundamentals
- Mason Graham Number — related ValueMarkers analysis
- Benjamin Graham Value Investing Formula — related ValueMarkers analysis
- Magic Formula Vs Net Net Investing — related ValueMarkers analysis
Frequently Asked Questions
what happens if the stock market crashes
When the stock market crashes, stock prices fall substantially in a short period, typically defined as a decline of 20% or more from a recent peak. For Graham-style investors, a crash is an opportunity: the margin of safety on existing positions increases if the underlying business fundamentals have not deteriorated, and new positions can be initiated at prices closer to or below the Graham Number for businesses that were previously too expensive. Graham's framework was designed specifically to perform during and after crashes by maintaining a price discipline that protects against overpaying.
what time does the stock market open
U.S. stock markets, including the NYSE and Nasdaq, open at 9:30 a.m. Eastern Time on trading days. Pre-market trading begins at 4:00 a.m. Eastern on most brokerage platforms, and after-hours trading extends to 8:00 p.m. Eastern. For investors applying Benjamin Graham's formula, the opening and closing times are largely irrelevant to valuation analysis; Graham's framework does not depend on intraday price movements.
are stock markets closed today
U.S. markets observe ten federal holidays per year: New Year's Day, Martin Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day, Juneteenth, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. If the holiday falls on a Saturday, markets close on Friday. If it falls on a Sunday, markets close on Monday. Check the NYSE holiday schedule directly or through any major brokerage for the current year's specific dates.
what time does the stock market close
The NYSE and Nasdaq close at 4:00 p.m. Eastern Time on regular trading days. After-hours trading on most platforms continues until 8:00 p.m. Eastern. Bond markets sometimes close earlier; futures markets have overnight sessions. The closing price is the figure used for end-of-day valuation calculations and for reporting official index levels.
when does the stock market open
U.S. stock markets open at 9:30 a.m. Eastern Time. International markets covered by ValueMarkers across 73 exchanges open at different local times; the London Stock Exchange opens at 8:00 a.m. GMT, the Tokyo Stock Exchange at 9:00 a.m. JST, and the Hong Kong Stock Exchange at 9:30 a.m. HKT. When applying Graham's formula internationally, use the exchange's primary trading hours for the most reliable price data.
why is the stock market down today
Market declines on any specific day typically result from a combination of macroeconomic news, earnings reports, central bank communications, geopolitical events, or sector-specific developments. From a Graham perspective, the question of why the market is down today is less important than whether the businesses you want to buy are now trading closer to or below their Graham Number. Temporary declines that do not affect underlying earnings power or book value are the mechanism by which Graham-style investors find their entry prices. Track your candidates with our guru tracker to see when their valuations enter the Graham-defined range.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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Disclaimer: This content is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any security. Past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.