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What Is the Graham Number?
The Graham Numberis a figure calculated using a company's earnings per share and book value per share to estimate the maximum price a defensive investor should pay for a stock. Developed by Benjamin Graham, the father of value investing and mentor to Warren Buffett; the concept was first laid out in his landmark 1949 book The Intelligent Investor, widely regarded as the definitive guide to value investing. The graham number calculatorabove implements Graham's original formula so you can instantly screen any stock against his classic defensive criteria.
Graham believed that individual investors, whom he called defensive investors, needed a simple, quantitative rule to avoid overpaying for stocks regardless of market sentiment. His answer was to impose two simultaneous constraints: the price-to-earnings ratio should not exceed 15, and the price-to-book ratio should not exceed 1.5. Together these rules ensure you are not paying an excessive multiple of either earnings or net assets. The Graham Number formula collapses both constraints into a single maximum price, making it one of the most efficient value-investing screens ever devised.
According to research published on the Graham Number overview at Investopedia, academic back-tests have generally found that portfolios constructed using the Graham Number screen historically outperformed the broader market over long time horizons, particularly during bear markets when value stocks tend to hold up better than speculative growth names.
The Graham Number Formula Explained
The Graham Number formulais: Graham Number = √(22.5 × EPS × BVPS). The constant 22.5 is derived directly from Graham's two rules: a maximum P/E of 15 multiplied by a maximum P/B of 1.5 equals 22.5. To understand why the square root is taken, consider what happens when you set both constraints simultaneously. If P/E ≤ 15 and P/B ≤ 1.5, then (Price/EPS) × (Price/BVPS) ≤ 22.5, which means Price² ≤ 22.5 × EPS × BVPS. Taking the square root of both sides gives Price ≤ √(22.5 × EPS × BVPS), the Graham Number. Any stock trading below this level passes both of Graham's original valuation rules simultaneously.
As a worked example: a stock with EPS of $4.50 and BVPS of $32.00 has a Graham Number of √(22.5 × 4.50 × 32.00) = √(3,240) ≈ $56.92. If the stock trades at $45, it sits 21 percent below the Graham Number, a meaningful margin of safety by Graham's standards. If it trades at $70, it exceeds the Graham Number by 23 percent and fails the screen. The graham number calculator above does all this arithmetic instantly, along with the P/E × P/B combined multiple check.
EPS and BVPS are both standard line items in a company's financial statements. You can retrieve them from the company's latest 10-K or 10-Q filing on the SEC's EDGAR database. Use diluted EPS from the income statement and total stockholders' equity divided by diluted shares outstanding from the balance sheet for BVPS. Our book value per share calculator and earnings per share calculator can help you derive each input from raw financial statement data.
Benjamin Graham's Defensive Investor Criteria
The Graham Number is one part of a broader checklist Graham developed for defensive investors in The Intelligent Investor. His full criteria for stock selection included adequate size of enterprise (annual sales of at least $100 million in his era, adjusted upward for inflation today), a sufficiently strong financial condition (current ratio of at least 2:1 for industrials, limited long-term debt relative to net current assets), earnings stability (positive EPS for each of the past ten years), an uninterrupted dividend record for at least twenty years, earnings growth of at least one-third over the prior ten years, a moderate P/E ratio not exceeding 15, and a moderate ratio of price to assets, the P/B constraint that feeds directly into the graham number calculator.
The graham number formula specifically operationalizes the last two criteria, P/E and P/B, into a single, easy-to-compare number. Graham intended these criteria to be applied together as a package, not individually. A stock that passes the price screen but fails the earnings stability or financial strength tests is not necessarily a safe investment. Always use the graham number calculator as an initial quantitative filter and then verify the qualitative criteria manually.
The full defensive investor framework is described in detail in Chapter 14 of The Intelligent Investor, available in most public libraries. The updated commentary edition by Jason Zweig provides important context for applying Graham's rules to the modern market environment, where sector compositions and valuation norms have shifted considerably since 1949. Explore the full suite of investing tools to supplement your Graham Number analysis with ratio checks, dividend analysis, and return calculations.
How to Find EPS and Book Value Per Share
To run the graham number calculator accurately, you need two verified inputs. Earnings Per Share (EPS): use diluted TTM EPS, which reflects earnings over the trailing twelve months and accounts for all potentially dilutive securities (stock options, convertible notes, warrants). Diluted EPS is reported on the income statement in the company's 10-K (annual) and 10-Q (quarterly) filings. For US-listed companies, the most recent data is always available free of charge on EDGAR. Avoid using adjusted or non-GAAP EPS figures in the graham number formula unless you have a specific reason to believe the adjustments are economically meaningful; GAAP EPS is the standard Graham used.
Book Value Per Share (BVPS): divide total stockholders' equity (from the balance sheet) by the number of diluted shares outstanding. Total stockholders' equity is assets minus liabilities and represents the net asset value attributable to common shareholders after all debts are paid. For companies with preferred stock, subtract preferred equity from total stockholders' equity before dividing by common shares outstanding. Note that for companies that have repurchased large amounts of stock, stockholders' equity can be negative, in those cases the Graham Number formula is undefined and the stock does not qualify for this screen.
Financial data aggregators such as Yahoo Finance, Macrotrends, and Wisesheets display both EPS and BVPS on their key statistics or financials pages, making it straightforward to gather the inputs without reading the full SEC filings. According to the Damodaran database at NYU Stern, sector-level EPS and book value averages are published annually, which can help you calibrate whether the individual stock's inputs look reasonable relative to industry norms before running the graham number calculation.
Limitations of the Graham Number and How to Use It Responsibly
The Graham Number formula is a powerful initial screen but carries several important limitations investors should understand before acting on its output. First, it is entirely backward-looking. Both EPS and BVPS reflect historical performance, not future earnings power. A stock can pass the graham number calculator screen at the bottom of an earnings trough and then fail the following year as earnings recover and push the price higher, or it can appear cheap using peak-cycle earnings that are about to collapse. Always consider where the company is in its earnings cycle before placing too much weight on a single-period calculation.
Second, the formula is structurally biased against asset-light businesses. A software company with $10 of EPS and $5 of BVPS produces a Graham Number of only $33.54, far below a reasonable market price, because the formula heavily weights book value. Yet the software company may be worth far more than its book value suggests because its value lies in intellectual property and recurring revenue rather than tangible assets. Graham himself acknowledged this limitation and noted that the formula was designed primarily for industrial and financial companies where tangible assets are central to the business model.
Third, the formula ignores debt. Two companies with identical EPS and BVPS figures will produce the same Graham Number, even if one carries ten times the debt of the other. Leverage amplifies risk and should always be evaluated alongside the graham number calculation. Use our debt-to-equity ratio calculator to check leverage before acting on a Graham Number screen result. Similarly, complement your analysis with our P/E ratio calculator and intrinsic value calculator to triangulate on a more complete picture of what any stock is actually worth before making an investment decision.