Graham Number

Formula

Graham Number = √(22.5 × EPS × BVPS)

EPS = earnings per share; BVPS = book value per share. The constant 22.5 reflects Graham's rule of P/E × P/B ≤ 22.5.

How to interpret it

If the stock's current price is below the Graham Number, it's considered attractively valued — theoretically cheap. If the price is above it, the stock is considered expensive by Graham's criteria. For example, if a stock with a Graham Number of $120 trades at $80, it's at a discount by Graham's logic.

Example

For a company with earnings per share (EPS) of $10 and book value per share of $40: √(22.5 × 10 × 40) = √9000 ≈ $94.9. If the stock trades at $70, it's below the Graham Number and may be of interest from a value standpoint.

Common uses

• Screen for stocks trading below their Graham Number as candidates for deeper value analysis.
• Set a conservative ceiling price before buying a defensive, profitable company.
• Compare the Graham Number with the current price to gauge how much margin of safety exists.
• Filter out richly priced stocks where the market pays far more than earnings and book value justify.

Limitations

• The Graham Number can't be used for unprofitable companies (negative EPS) or those with negative book value.
• It can mislead for growth or tech companies that have few assets but high growth potential — it was designed for asset-heavy, stable companies.
• Use it alongside other metrics, not alone.