The Graham Number: What It Is and How to Calculate It
What Is the Graham Number?
The Graham Number is a formula that estimates the maximum price a conservative investor should pay for a stock, based on its earnings and book value.
Benjamin Graham came up with this formula back in the 1940s as a quick gut check for how much a cautious investor should pay for a stock. He wasn't trying to predict where the price would go; he was trying to set a ceiling. Pay more than the Graham Number and you're outside the bounds of what he'd consider a defensive purchase, no matter how good the story sounds.
It shows up in The Intelligent Investor, still the book most value investors read first. Graham built it for a specific kind of investor, someone who wants a simple filter rather than a spreadsheet full of assumptions about the next ten years.
Graham Number Calculator
Graham Number = √(22.5 × EPS × BVPS)
What the Number Is Telling You
Feed in a company's earnings per share and its book value per share, and you get back a single euro figure: the most a conservative buyer should pay, according to Graham's rules.
Under the hood it's applying two limits at once. No more than 15 times earnings (a ceiling on the P/E ratio), and no more than 1.5 times book value (a ceiling on the P/B ratio). A stock can pass one test and fail the other. Something can look cheap relative to earnings while still being expensive relative to what the company actually owns, or the other way around. The Graham Number won't pass a stock unless both checks clear.
Graham Number Formula
Graham Number = √(22.5 × EPS × BVPS)
EPS is trailing twelve-month earnings per share. BVPS is book value per share, shareholder equity divided by shares outstanding. The 22.5 isn't arbitrary. It's just 15 times 1.5, Graham's two ceilings multiplied together into one constant.
Graham Number Example
Take a company earning €2.00 per share with €18.00 of book value per share:
√(22.5 × 2.00 × 18.00) = √810 ≈ €28.46
Trading under €28.46, the stock clears Graham's bar. Above it, this particular test says no. That doesn't mean the stock is a bad investment, just that it fails this one conservative screen.
Limitations of the Graham Number
This is the part most calculator pages skip, and it's probably the most useful section for readers who've already run into the formula somewhere else.
The math breaks completely if EPS or book value is negative. You end up trying to take the square root of a negative number, which doesn't resolve to anything. That rules out a lot of cyclical companies mid downturn, and pretty much all early stage growth names.
It also has nothing to say about growth. A company compounding earnings at 20% a year gets measured the exact same way as one that's shrinking, because the formula only looks at a single snapshot in time. That makes it a bad fit for most tech or biotech names, where the market is pricing in what happens next rather than what already happened.
Debt doesn't factor in anywhere either. Two companies can post identical EPS and BVPS while one carries far more leverage than the other, and the Graham Number will treat them as equally attractive. Checking the debt-to-equity ratio alongside it fills that gap.
Book value itself is also easier to distort than it was in Graham's day. Buybacks, goodwill, intangible heavy balance sheets can all push BVPS away from what the business is actually worth in any real sense. Graham was working in an era of asset heavy industrials with straightforward balance sheets, and a lot of today's companies don't look like that at all.
And it says nothing about cash. Earnings on paper aren't the same as cash actually coming in the door, and this formula can't tell the difference.
It works reasonably well on stable, asset heavy, profitable businesses like industrials, utilities and financials. Outside of that it doesn't have much to say. Treat it as a first filter, not a verdict, and pair it with a genuine margin of safety rather than buying the instant a stock clears the bar.
FAQ
Is the Graham Number still relevant?
Yes, as a first filter. It still works reasonably well on stable, asset-heavy, profitable businesses like industrials, utilities and financials. It's a poor fit for growth or tech companies, though, since it ignores growth entirely and can't produce a result at all when earnings are negative.
What is a good Graham Number result?
There's no universally "good" Graham Number in isolation, it only means something next to the current share price. If the stock is trading below its Graham Number, it clears Graham's conservative bar. Trading above it, this particular test says no, even if the business is otherwise sound.
Nothing on this site is financial advice. It's a personal record of my own research and decisions, shared for transparency, not as a recommendation to buy or sell anything.