What this calculator does
Benjamin Graham proposed a simple ceiling for what a defensive investor should pay: the square root of 22.5 times earnings per share times book value per share. The 22.5 comes from his limits of a P/E of 15 and a P/B of 1.5, multiplied together.
It is deliberately conservative and it excludes most of the modern market. A stock with $3.50 of earnings and $28 of book value gives a Graham number of $46.96, so a $65 price sits 38.4 per cent above what the rule would sanction.
The formula
Multiply 22.5 by earnings per share and by book value per share, then take the square root. Comparing the result with the current price shows the premium or discount.
| Term | Meaning |
|---|---|
| Graham number | The maximum price a defensive investor should pay under Graham's rule. |
| 22.5 | Graham's P/E limit of 15 multiplied by his P/B limit of 1.5. |
| Margin of safety | The central idea, of buying well below estimated value to allow for error. |
The inputs explained
| Field | What to enter |
|---|---|
| Earnings per share ($) | Earnings per share, ideally averaged over several years to smooth out volatility. |
| Book value per share ($) | Book value per share, being shareholders' equity divided by shares outstanding. |
| Current share price ($) | The current share price, for comparison against the result. |
When to use it
Screening for defensive value
Stocks trading below their Graham number are a short list worth examining further.
Sanity-checking a purchase
Knowing how far above the rule a price sits makes the premium being paid explicit.
Understanding value investing
The formula is a compact statement of what Graham thought a conservative investor should insist on.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does the fair price move with earnings?
The same book value at three levels of earnings.
| Earnings per share | Graham number | Current price vs Graham number |
|---|---|---|
| $2.00 | $35.50 | 83.1% above it |
| $3.50 | $46.96 | 38.4% above it |
| $5.00 | $56.12 | 15.8% above it |
Questions
Why 22.5?
It is Graham's maximum P/E of 15 multiplied by his maximum P/B of 1.5. He was willing to breach one limit if the other compensated, and the product is what allows that trade-off in a single number.
Does the formula still work?
It excludes most of the modern market, particularly technology and service businesses whose value does not appear on the balance sheet. As a conservative screen for asset-heavy companies it retains some use; as a general rule it is very restrictive.
Should earnings be averaged?
Graham recommended using an average over several years, precisely because a single good or bad year distorts the answer. Using one year's figure makes the result much more volatile than intended.
Is this investment advice?
No. It is a historical rule of thumb from one particular school of thinking, not an assessment of any specific company. Anyone making investment decisions should consult a licensed adviser.
For the individual ratios behind it, see the valuation multiples calculator. For a dividend-based valuation instead, see the dividend discount model calculator.