Graham Number Explained: How to Find Undervalued Stocks Like Benjamin Graham
The graham number is a formula Benjamin Graham developed to set an upper price limit for a defensive stock. The math combines earnings per share and book value per share into a single fair-value estimate. If the stock trades below that number, it passes Graham's basic price test. If it trades above, he would not touch it without further justification. The formula is: Graham Number = square root of (22.5 x EPS x Book Value Per Share). That 22.5 comes from a rule Graham stated clearly in "The Intelligent Investor": a stock is speculative when its P/E exceeds 15 or its price-to-book exceeds 1.5, and 15 x 1.5 = 22.5.
The graham number is not a complete valuation model. It is a price ceiling, a quick filter Graham designed for defensive investors who wanted a single quantitative test before doing deeper work.
Key Takeaways
- The graham number formula is: square root of (22.5 x EPS x Book Value Per Share). The result is the maximum price a defensive investor should pay.
- It combines two Graham rules: P/E no higher than 15, price-to-book no higher than 1.5. Multiplying those limits gives the 22.5 constant.
- The formula works best on asset-heavy, profitable businesses with stable earnings: banks, insurers, manufacturers, consumer staples.
- Asset-light companies (software, platforms, consumer brands) typically have very low book values, which makes the graham number artificially low and misleading.
- For context: with Apple's EPS near $6.43 and a near-zero tangible book value, the traditional graham number barely registers. The formula was not built for this type of business.
- The graham number is a starting screen, not a final answer. It tells you what to investigate, not what to buy.
The Graham Number Formula in Full
Graham laid out the formula in "Security Analysis" and refined it in "The Intelligent Investor." The exact derivation:
Graham Number = (22.5 x EPS x BVPS)^0.5
Where:
- EPS = trailing twelve-month earnings per share (diluted)
- BVPS = book value per share (total equity divided by shares outstanding)
- 22.5 = the product of Graham's two price limits (P/E max of 15, P/B max of 1.5)
The formula assumes both conditions hold simultaneously. If you buy at or below the graham number, you satisfy both the earnings-based and asset-based price tests at the same time.
A worked example with Johnson & Johnson (JNJ): JNJ's trailing EPS is approximately $8.70 and book value per share runs close to $27.50. Multiply: 22.5 x 8.70 x 27.50 = approximately 5,384. Take the square root: Graham Number is roughly $73.40. JNJ trades significantly above that level. At its current share price near $155, the stock trades at roughly 2.1x its graham number. By Graham's original standard, JNJ is not a defensive buy at current prices, though its 3.1% dividend yield and long earnings history explain why many income investors still hold it.
What the 22.5 Constant Actually Means
The 22.5 multiplier is not arbitrary. It is the product of two explicit constraints Graham imposed on defensive stock purchases.
Constraint one: P/E no greater than 15. This was Graham's assessment of the maximum price a conservative investor should pay per dollar of earnings in the long-run average market. He was writing in the 1940s through 1970s, when interest rates and market valuations were structurally different from today.
Constraint two: P/B no greater than 1.5. This ensured the investor was not paying much more than the liquidation value of the underlying assets. Graham was deeply influenced by the Great Depression, when many investors discovered that the "earnings power" they had paid for vanished while physical assets remained.
If you buy at exactly the graham number price, you are buying at a P/E of exactly 15 and a P/B of exactly 1.5 simultaneously. Buying below it means you get better terms on one or both dimensions.
Graham Number Benchmarks: Where Stocks Stand Today
Running the graham number on a cross-section of well-known stocks reveals how much the modern market has moved away from Graham's original price limits.
| Company | Trailing EPS | Book Value / Share | Graham Number | Current Price | Price / Graham |
|---|---|---|---|---|---|
| Johnson & Johnson (JNJ) | $8.70 | $27.50 | ~$73.40 | ~$155 | 2.1x |
| Berkshire Hathaway B (BRK.B) | ~$19.00 | ~$275.00 | ~$344 | ~$450 | 1.3x |
| JPMorgan Chase (JPM) | ~$18.50 | ~$110.00 | ~$214 | ~$235 | 1.1x |
| Coca-Cola (KO) | ~$2.85 | ~$5.60 | ~$19.00 | ~$70 | 3.7x |
| Apple (AAPL) | ~$6.43 | ~$3.80 | ~$23.40 | ~$230 | 9.8x |
| Microsoft (MSFT) | ~$12.00 | ~$35.00 | ~$97.50 | ~$410 | 4.2x |
Numbers are approximate as of early 2026.
The table shows two patterns. First, most large-cap U.S. stocks trade well above their graham numbers today. The broad market P/E expansion since the 1970s means Graham's 15x P/E ceiling is rarely met by quality businesses. Second, more asset-intensive businesses (JPMorgan, Berkshire) come closest to meeting the test, because book value is substantial relative to share price.
How to Calculate the Graham Number Step by Step
Step 1. Find trailing twelve-month diluted EPS from the income statement. Use the most recent four quarters. Avoid using forward EPS estimates, since Graham believed in conservatism and known facts.
Step 2. Find book value per share. Take total shareholders' equity from the balance sheet and divide by diluted shares outstanding. For banks, this is straightforward. For technology companies, goodwill and intangibles may be worth subtracting (use tangible book value) to get a more conservative denominator.
Step 3. Multiply EPS by book value per share. Multiply that result by 22.5.
Step 4. Take the square root of the result. That is the graham number.
Step 5. Compare to the current stock price. If the price is at or below the graham number, the stock passes Graham's first-level price test. If it trades at 2x or 3x the graham number, Graham would require exceptional justification to proceed.
You can check these calculations in minutes using our screener, which surfaces graham number, P/E, and P/B alongside 120+ other fundamental indicators for any U.S. stock.
The Graham Number vs. Intrinsic Value: An Important Distinction
The graham number is often described as an intrinsic value estimate. That description overstates what the formula does.
Intrinsic value, as Graham and later Buffett defined it, is the present value of all cash flows a business will generate over its remaining life, discounted at an appropriate rate. Calculating true intrinsic value requires assumptions about future revenue growth, margin evolution, reinvestment requirements, and discount rates. It is done with a DCF model, not a two-variable square root formula.
The graham number is better understood as a maximum entry price for a defensive investor, not a measurement of what the business is worth. It tells you when a stock is clearly cheap on asset and earnings grounds. It does not tell you how much a franchise business with durable earnings growth is actually worth.
Coca-Cola at 3.7x its graham number is not necessarily overvalued. KO's ability to generate consistent free cash flow, grow its dividend (KO yields 3.0% and has raised its dividend for 60+ consecutive years), and maintain brand pricing power is worth something the graham number formula cannot capture. Intrinsic value for KO is considerably higher than the graham number suggests.
When the Graham Number Works Best
The formula performs as Graham intended when applied to the type of company he was analyzing: asset-heavy, capital-intensive, with stable and predictable earnings.
Good candidates for graham number analysis:
- Commercial banks and regional lenders
- Insurance companies
- Industrial manufacturers
- Utility companies
- Consumer staples with significant physical assets
Poor candidates:
- Software and platform companies (book value near zero, earnings volatile)
- Early-stage growth companies (no or minimal earnings)
- Pharmaceutical biotechs (patent values not on the balance sheet)
- Asset-light consumer brands where franchise value drives pricing
The danger is applying the formula to asset-light businesses and concluding that Apple at 9.8x its graham number is massively overvalued. Apple's book value is depressed by share buybacks and by the fact that most of its value lies in its installed base, software ecosystem, and supply chain relationships, none of which appear on a balance sheet. The graham number will always produce a low figure for Apple, regardless of what Apple is actually worth.
Further reading: Investopedia · CFA Institute
Why benjamin graham formula Matters
This section anchors the discussion on benjamin graham formula. 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 benjamin graham formula 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 benjamin graham formula
See the main discussion of benjamin graham formula 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 benjamin graham formula alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
Sector benchmarks for benjamin graham formula
See the main discussion of benjamin graham formula 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 benjamin graham formula alongside the rest of the 120-indicator composite, with sector percentiles and historical trends shown on every stock profile.
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Frequently Asked Questions
what is the graham number formula
The graham number formula is: Graham Number = square root of (22.5 x EPS x Book Value Per Share). The 22.5 constant comes from Benjamin Graham's two valuation rules: P/E should not exceed 15 and price-to-book should not exceed 1.5, and 15 x 1.5 = 22.5. The result is the highest price a defensive investor should pay for a stock under Graham's criteria. If the current share price is at or below this number, the stock meets both the earnings and asset-based price tests simultaneously.
what is a good graham number
A "good" graham number is one where the current share price is at or below the calculated figure. If the graham number comes out to $80 and the stock trades at $65, the stock is trading at an 18.75% discount to Graham's maximum price. Graham considered a margin of safety of at least 33% below fair value ideal, so a stock at $53 against a graham number of $80 would be closer to his preferred entry point. The absolute dollar value of the graham number is not meaningful on its own. What matters is the ratio of current price to the graham number.
how accurate is the graham number
The graham number is reasonably accurate as a screening filter for asset-heavy, profitable businesses trading at depressed valuations. It is not accurate as a standalone valuation tool for most modern companies. The formula was designed in an era when physical assets and near-term earnings power drove most of a business's value. Today, many of the most valuable companies earn high returns precisely because their competitive advantages are intangible: brands, software, network effects, and switching costs that do not appear on a balance sheet. For these companies, the graham number systematically underestimates fair value.
what is the difference between graham number and intrinsic value
The graham number is a maximum entry price based on current EPS and book value. Intrinsic value is the present value of all future cash flows the business will generate. The graham number uses two observable balance-sheet figures and a fixed multiplier. Intrinsic value requires forecasting future earnings, growth rates, and applying a discount rate, typically done through a discounted cash flow model. The graham number is a quick, conservative filter. Intrinsic value is a considered estimate of what the business is actually worth to a long-term owner. For most quality franchises, intrinsic value is meaningfully higher than the graham number.
can the graham number be used for growth stocks
The graham number is poorly suited to growth stocks. Growth companies typically trade at high P/E multiples because investors are paying for future earnings, not just current earnings. The graham number uses trailing EPS and penalizes any company whose P/E exceeds 15. Most legitimate growth stocks trade at 25x to 50x earnings. The formula will label virtually every growth stock as overpriced, which is not useful analysis. Graham himself acknowledged that his defensive investor criteria were not designed for growth investing. He treated growth stocks as a separate, more speculative category that required different tools and a different risk tolerance.
how to use graham number to find undervalued stocks
Start by screening for stocks with positive EPS and positive book value, since the formula requires both. Calculate the graham number and compare it to the current share price. Look for stocks trading at 80% or less of their graham number to build in a margin of safety. Focus on sectors where the formula is meaningful: banks, manufacturers, industrials, consumer staples. Then investigate further: check the trend in EPS over five years (declining earnings make a low P/E misleading), examine debt levels (high debt raises risk regardless of price), and verify that book value is real (not inflated by goodwill from overpriced acquisitions). The graham number tells you which stocks to look at. The deeper work tells you which ones to buy.
Screen any U.S. stock against the graham number, P/E, and P/B in seconds using our screener.
Written by Javier Sanz, Founder of ValueMarkers. Last updated April 2026.
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