Graham Number Calculator

Benjamin Graham established his famous formula to identify bargain stocks that offer a margin of safety. The core calculation relies on the traditional maximum price-to-earnings (P/E) multiplier of 15 and a maximum price-to-book (P/B) multiplier of 1.5. Multiplying these two thresholds together yields the constant factor of 22.5. The mathematical expression is defined as: Graham Number = Square Root of (22.5 * Earnings Per Share * Book Value Per Share). Additionally, you can evaluate the percentage difference between the calculated Graham number and the current market price using the formula: Percentage Difference = (Graham Number - Current Price) / Current Price. A positive percentage indicates the stock is trading below its estimated fair value.

Imagine you are analyzing a manufacturing company with a TTM net income of $50 million, total shareholders' equity of $300 million, and 10 million shares outstanding. First, calculate the earnings per share (EPS) by dividing net income by the number of shares: $50,000,000 / 10,000,000 = $5.00. Next, calculate the book value per share (BVPS) by dividing shareholders' equity by shares outstanding: $300,000,000 / 10,000,000 = $30.00. Now, apply these values to the Graham number formula: Square Root of (22.5 * 5.00 * 30.00) = Square Root of 3,375 = $58.09. If the current market price of the stock is $45.00, the percentage difference is ($58.09 - $45.00) / $45.00 = +29.1 percent, signaling a potentially undervalued asset.

While the Graham number is a fantastic screening tool, keep these practical guidelines in mind. First, remember that Benjamin Graham designed this formula during an era dominated by heavy manufacturing and tangible assets; modern technology and service companies with high intangible assets may yield skewed results. Second, always cross-reference the Graham number with other fundamental metrics like debt-to-equity ratios and free cash flow. Finally, never treat the Graham number as a precise target price, but rather as a conservative threshold for further qualitative research.