Graham number

Note that this number applies only to certain types of stocks in combination with a number of other criteria. The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.[1]

The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value.[2] Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:

\sqrt{22.5\times(\text{earnings per share})\times(\text{book value per share})}

The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.[3] Put another way, a stock priced below the Graham Number would be considered a good value.

Alternative calculation

Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:

\sqrt{22.5 \times \left(\frac{\text{net income}}{\text{shares outstanding}}\right) \times \left(\frac{\mathrm{shareholders'\ equity}}{\text{shares outstanding}}\right)}

References

  1. ^ Anahin. Graham's selection procedures and Anahin.
  2. ^ Seeking Alpha: The Graham Number
  3. ^ iStock Analyst: The Benjamin Graham Number