The Graham Number

A Simple Formula for Fair Value

The Graham Number is a formula Benjamin Graham developed to quickly estimate the maximum fair price for a stock. It combines two fundamental metrics: earnings per share (EPS) and book value per share (BVPS).

The beauty of this formula is its simplicity. You don't need complex models or predictions about the future. Just two numbers from the company's financial statements.

The Formula

Graham Number = √(22.5 × EPS × Book Value)

The constant 22.5 comes from Graham's guidelines: a maximum P/E ratio of 15 and a maximum price-to-book ratio of 1.5. When you multiply these together (15 × 1.5), you get 22.5.

The Graham Number represents the maximum price a defensive investor should pay for a stock.

— Benjamin Graham

Step-by-Step Calculation

Step 1: Find the company's earnings per share (EPS) from recent financials. For Coca-Cola, let's say EPS is $2.69.

Step 2: Find the book value per share. For KO, it's approximately $6.23.

Step 3: Multiply 22.5 × $2.69 × $6.23 = $377.05

Step 4: Take the square root: √377.05 = $19.42

Wait—that seems low for Coca-Cola! That's because the Graham Number works best for asset-heavy companies. KO's value comes from its brand, not its book value. We'll cover limitations in later lessons.

When to Use (and Not Use) the Graham Number

The Graham Number works well for: banks, insurers, utilities, manufacturers, and other asset-heavy businesses where book value is meaningful.

It's less useful for: tech companies, brands, service businesses, and any company where intangible assets (patents, brand value, network effects) drive value.