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Intrinsic ValueGraham

What is the Graham Number?

The Graham Number is a formula developed by Benjamin Graham to establish an upper bound for a stock's intrinsic value based on its earnings and book value. Defined as the square root of (22.5 times earnings per share times book value per share), it provides a quick screen for undervaluation. A stock trading below its Graham Number may be priced attractively by classic value investing standards.

Formula

Graham Number = sqrt(22.5 x EPS x BVPS)

Using the Graham Number as a Margin of Safety Screen

Graham designed this formula for the "defensive investor" -- someone who wants a simple, quantitative screen to avoid overpaying. The logic is straightforward: if you are paying no more than 15x earnings and no more than 1.5x book value simultaneously, you have built in a significant cushion against unpleasant surprises.

Warren Buffett extended Graham's framework by recognizing that a "wonderful company at a fair price" can be worth far more than its Graham Number implies, especially if it has durable earnings power and high returns on equity. The Graham Number works best as a first-pass filter -- stocks that fail it are probably overpriced; stocks that pass it deserve deeper analysis.

Calculate Margin of Safety

Once you have the Graham Number, compare it to the current market price to see the percentage discount or premium. Use our Margin of Safety Calculator for a fuller intrinsic value analysis.

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Frequently Asked Questions

What is the Graham Number?+
The Graham Number is an intrinsic value upper bound popularized by Benjamin Graham in "The Intelligent Investor." It uses just two inputs -- earnings per share (EPS) and book value per share (BVPS) -- to estimate the maximum price a defensive investor should pay for a stock. If the current market price is below the Graham Number, the stock may offer a margin of safety. It is primarily a screening tool rather than a precise valuation model.
How do you calculate the Graham Number?+
Graham Number = sqrt(22.5 x EPS x BVPS). For example, if a stock has EPS of $4 and BVPS of $30, the Graham Number is sqrt(22.5 x 4 x 30) = sqrt(2,700) = approximately $51.96. If the stock trades below $51.96, it passes this first screen. Note that both EPS and BVPS should be positive for the formula to produce a meaningful result.
What are the limitations of the Graham Number?+
The Graham Number was designed for asset-heavy industrial businesses of the mid-20th century. It struggles with asset-light technology and services companies where book value understates true worth. It also ignores growth prospects, return on equity, and competitive moats. Most modern value investors use it as a quick first screen rather than a standalone buy signal. Graham himself intended it as a minimum standard, not a ceiling on what a wonderful business could be worth.
What does the 22.5 multiplier mean?+
The 22.5 multiplier comes from Graham combining two criteria: no more than 15 times earnings (P/E <= 15) and no more than 1.5 times book value (P/B <= 1.5). Multiplying those together: 15 x 1.5 = 22.5. Taking the square root ensures the formula is symmetric -- it penalizes extremes in either ratio. So 22.5 is not an arbitrary number; it encodes both of Graham's classic valuation guardrails simultaneously.

Related Terms

Price-to-Earnings Ratio

Market price divided by earnings per share

Price-to-Book Ratio

Market price vs net asset value per share

Earnings Per Share

Net income attributable per diluted share

Net Present Value

Discounted sum of future cash flows

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