Most investors stumble onto the Graham Number through Warren Buffett references or value investing forums, but they often miss what makes it genuinely useful. The Graham Number isn’t just another ratio to add to your screening toolkit—it’s a floor calculation that tells you the maximum price a defensive investor should reasonably pay for a stock, based on two fundamental metrics: earnings and book value. What surprises most people is that Benjamin Graham, the man who created this formula in the 1950s, explicitly designed it as a conservative boundary, not a target price. Yet many modern screeners treat it as a magical threshold that automatically identifies undervalued stocks. That’s not wrong, but it’s incomplete. The Graham Number works best when you understand why Graham chose those specific parameters and where his original framework breaks down in today’s market.
The Graham Number Formula Explained
The Graham Number formula is straightforward: √(22.5 × EPS × BVPS)
That’s the square root of 22.5 multiplied by earnings per share and book value per share. Each component matters—mess up any piece and your calculation will be off.
EPS (earnings per share) is net income divided by outstanding shares. You’ll find it in any quarterly report, typically listed right at the top of the summary page. Graham used trailing twelve-month EPS, though some investors prefer forward estimates for growth-oriented analysis.
BVPS (book value per share) is total shareholders’ equity divided by outstanding shares. This represents what would theoretically remain for shareholders if the company liquidated everything and paid off all debts. Take total equity from the balance sheet, divide by shares outstanding—that’s your number.
The 22.5 multiplier comes from Graham’s original guidance: defensive investors shouldn’t pay more than 15 times earnings and 1.5 times book value. Multiply those together—15 × 1.5 = 22.5—and you get the bridge between earnings and book value valuations.
Here’s what many tutorials miss: Graham designed this for “defensive investors”—people who wanted solid, boring companies with predictable earnings and tangible assets. He wasn’t trying to find the next Amazon. He was trying to avoid getting ripped off on companies with reasonable fundamentals. That context changes how you should apply the formula.
How to Calculate the Graham Number: A Step-by-Step Walkthrough
Let’s walk through a real calculation. I’ll use Caterpillar (CAT) from late 2024 to make this concrete.
First, gather the data:
- EPS (TTM): approximately $11.40
- Book value per share: approximately $27.50
- Current stock price: approximately $275
Now apply the formula: √(22.5 × 11.40 × 27.50)
Step one: Multiply 22.5 by EPS. 22.5 × 11.40 = 256.50
Step two: Multiply by BVPS. 256.50 × 27.50 = 7,053.75
Step three: Take the square root. √7,053.75 = 84.00
The Graham Number for Caterpillar is approximately $84.
That means, according to Graham’s original framework, Caterpillar trading above $84 per share would be considered too expensive for a defensive investor. Yet the stock trades at $275 as I write this. Either the formula is broken, or we’re missing something crucial about how to apply it.
The key insight: the Graham Number isn’t a prediction that stocks should trade at that price. It’s a screening tool that identifies stocks potentially trading below their conservative fair value. A stock trading significantly below its Graham Number might be undervalued. A stock trading well above it doesn’t necessarily mean it’s overvalued—it might mean the company has grown beyond what Graham’s conservative framework can capture.
How to Use the Graham Number for Stock Screening
The basic screen is simple: find stocks where the current price is below the Graham Number. But “below” by how much?
Most value investors use a margin of safety approach. If a stock trades at 50% or less of its Graham Number, that’s often considered deeply undervalued. Trading at 70% suggests moderate undervaluation. Some investors use any discount as a starting point, then dig deeper.
Here’s my workflow:
Run a broad screen using any major financial data provider. Most offer Graham Number screeners—you input criteria and get a list of stocks trading below their calculated fair value. Stick to companies with market caps above $2 billion initially; smaller stocks often have data quality issues that make the calculation unreliable.
Verify the inputs before trusting any result. Pull actual financial statements and confirm the EPS and BVPS numbers the screener used. I’ve found significant discrepancies between screener data and official filings, especially for companies with complex share structures or recent acquisitions.
Apply additional filters. The Graham Number works best combined with other checks:
- Positive earnings over the trailing twelve months
- No consecutive years of earnings losses
- Moderate debt levels (debt-to-equity below 1.0 for most industries)
- Stable or growing earnings over five years
Calculate the margin of safety by dividing the current price by the Graham Number. If a stock trades at $60 with a Graham Number of $100, that’s a 40% margin of safety—you’re paying $60 for $100 worth of theoretical floor value.
Real-world examples of stocks that frequently pass Graham Number screens include financial institutions like JPMorgan Chase, consumer staples companies like Procter & Gamble, and certain industrial companies during market corrections. These are precisely the types of boring, established businesses Graham favored.
Graham Number vs. Other Valuation Methods
The Graham Number sits alongside other valuation frameworks, and understanding what it captures differently matters.
Price-to-earnings ratio (P/E) measures earnings only, ignoring book value entirely. A company with minimal book assets (most tech companies) will show a P/E but might have no meaningful Graham Number calculation if book value is negative or near zero. The Graham Number forces you to consider asset value alongside earnings.
Price-to-book ratio (P/B) measures book value only, ignoring earnings. A company with strong earnings but low book assets might show attractive P/B ratios but fail the Graham Number test because earnings justify higher prices. Graham Number combines both.
Discounted cash flow (DCF) projects future cash flows and discounts them back to present value. This is theoretically more sophisticated but requires assumptions about growth rates, discount rates, and terminal values—all of which introduce significant judgment. The Graham Number requires no assumptions about the future; it’s purely historical.
Here’s where I need to acknowledge a real limitation: the Graham Number has a significant blind spot for growth. A company growing earnings at 20% annually will look expensive by Graham Number standards because current earnings are low relative to future potential. Value investors argue this is exactly the point—you shouldn’t pay for future growth you haven’t earned yet. Growth investors counter that ignoring growth entirely leaves money on the table. Both perspectives have merit, and which framework you prefer depends on your investment philosophy.
When the Graham Number Fails: Limitations and Criticisms
I’ve already hinted at some limitations, but let me be direct because this is where most articles on the Graham Number let their readers down.
The 22.5 multiplier is arbitrary. Graham himself acknowledged this was a guideline, not a rule. He suggested investors adjust based on interest rates and general market conditions. In a high-interest-rate environment, 22.5 might be too generous; in extremely low-rate environments, it might be too restrictive. There’s no perfect adjustment mechanism, which means the Graham Number is more useful as a screening tool than a precise fair value calculation.
It doesn’t work for companies without positive book value. Tech companies, pharmaceutical firms with heavy R&D spending, and banks with complex balance sheets often have book values that don’t reflect their actual worth. The formula breaks down or produces artificially low numbers.
It penalizes efficient capital use. Companies that have deployed capital effectively—buying back shares, making profitable acquisitions—will have lower book values than less efficient competitors. A company that bought back half its shares will show depressed book value even if it’s creating enormous shareholder value. The Graham Number might incorrectly flag this efficient company as overvalued.
It ignores debt structure. Two companies might have identical earnings and book values, but one carries significantly more debt. Graham Number doesn’t distinguish between them. A highly levered company might show attractive valuation metrics but carry far more risk.
The historical data problem. Calculating accurate historical EPS and BVPS requires consistent accounting treatment. Companies that have changed accounting methods, undergone significant restructuring, or had major corporate actions may have misleading figures that produce inaccurate Graham Numbers.
The honest truth is that Graham designed this formula for a specific era of investing—mid-20th century American industrials with tangible assets and predictable earnings. It works well for that subset of the market. It works less well for modern companies that don’t fit that mold.
Practical Application: Building a Graham-Based Screening System
If you want to use the Graham Number in your workflow, here’s how I’d approach it.
Start with a screener to generate ideas. Both Finviz and StockFetcher offer Graham Number filters in their free versions. Run a screen for stocks trading below 70% of their Graham Number with market caps above $2 billion. This gives you a manageable list of candidates worth deeper analysis.
Next, calculate the Graham Number yourself for each candidate. Don’t rely on screener data—pull the actual 10-K or 10-Q and verify the numbers. This takes fifteen minutes per stock but prevents you from making decisions based on faulty data.
Then, apply qualitative judgment. Ask: Why is this stock cheap? Is there a specific problem the market is pricing in, or is this genuine undervaluation? The Graham Number tells you the “what”—the stock is below fair value—but it doesn’t tell you the “why.”
Finally, size your position appropriately. Even when the Graham Number suggests significant undervaluation, there’s usually a reason. Don’t concentrate heavily in any single Graham Number investment; maintain diversification even within your value holdings.
Frequently Asked Questions
What is the Graham Number formula?
The formula is the square root of 22.5 multiplied by earnings per share and book value per share: √(22.5 × EPS × BVPS).
What is a good Graham Number?
There’s no universal “good” Graham Number—it’s a calculation specific to each company. The relevant comparison is between a stock’s current price and its calculated Graham Number. A stock trading significantly below its Graham Number may be undervalued.
Does Graham Number still work?
The Graham Number remains a useful screening tool for value investing, particularly for companies with tangible assets and stable earnings. It works less well for growth companies, tech firms with minimal book value, and companies in rapidly changing industries.
What stocks are undervalued by Graham Number?
Stocks trading below their Graham Number are potentially undervalued by Graham’s framework. Financial institutions, consumer staples companies, and certain industrials frequently appear on Graham Number screens, especially during market corrections.
How do you calculate intrinsic value like Graham?
Graham’s approach focused on conservative, defensive criteria—the Graham Number being his primary quantitative metric. He also recommended looking for companies with consistent earnings, dividends, and moderate P/E and P/B ratios. Modern intrinsic value calculations often use discounted cash flow models instead.
Conclusion
The Graham Number remains relevant because its core insight—that you shouldn’t pay too much for earnings and book value—hasn’t changed. What has changed is the composition of the market. Today, some of the most successful companies have minimal book value and exponential growth trajectories that Graham’s framework simply cannot capture.
The smart approach isn’t to worship the Graham Number or dismiss it entirely. It’s to understand what it actually measures: a conservative floor value for boring, fundamental businesses. Use it as a screen to generate ideas, then apply the same rigorous analysis you’d use for any investment decision. The formula gives you a starting point, not an endpoint.
If you’re building a value-focused portfolio, the Graham Number deserves a place in your process—but it works best when paired with other analytical tools and an honest acknowledgment of its limitations. That’s not a weakness in the framework. That’s just intelligent investing.
