Graham Number

The Graham number (or Benjamin Graham's number) measures a stock's fundamental value by taking into account the company's earnings per share (EPS) and book value per share (BVPS). The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued and thus worth investing in. Understanding the Graham Number The Graham number is named after the "father of value investing," Benjamin Graham. It is used as a general test when trying to identify stocks that are currently selling for a good price. The 22.5 figure is included in the calculation to account for Graham's belief that the price-to-earnings (P/E) ratio should not be over 15x and the BVPS should not be over 1.5x (thus, 15 x 1.5 = 22.5). Example of the Graham Number For example, if the earning per share for a single share of company ABC is $1.50, the book value per share is $10, the Graham number would be 18.37. ((22.5*1.5*10)1/2= 18.37). Again, $18.37 is the maximum price an investor should pay for a share of ABC, according to Graham. If ABC is priced at $16, it is attractive; if priced at $19, it should be avoided. The Graham number takes a company's per-share metrics and normalizes it based on a recommended upward limit for value investors of 15x P/E and 1.5x P/B. (Note in this respect Book Value and EPS must be Positive Integer)