The Graham Number: Formula and How to Use It

Benjamin Graham — the father of value investing and Warren Buffett’s mentor — wanted a quick, conservative test for whether a stock was cheap enough to buy. The result is the Graham Number: a back-of-the-envelope estimate of the most a defensive investor should pay for a share.

The Graham Number formula

The formula combines a company’s earnings power and its net assets:

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

where EPS is earnings per share and book value per share is shareholders’ equity divided by shares outstanding. The 22.5 comes from Graham’s rule that a defensive stock should trade at no more than 15× earnings and 1.5× book value (15 × 1.5 = 22.5).

A worked example

Suppose a company earns $4.00 per share with a book value of $25 per share. The Graham Number is √(22.5 × 4 × 25) = √2,250 ≈ $47.4. Trading below ~$47, the stock passes Graham’s test; above it, a defensive investor would call it too expensive on this measure.

Where it works — and where it fails

The Graham Number works best for stable, asset-heavy, profitable businesses — banks, industrials, insurers — where book value is meaningful and earnings are steady. It breaks down for asset-light compounders (software, brands) whose value is intangible, and for unprofitable or cyclical firms where EPS is negative or erratic.

• Negative earnings or book value → the Graham Number can't be calculated.
• Asset-light businesses → it looks 'expensive' even when the business is wonderful.
• It ignores growth → a fast grower can be worth far more than its Graham Number.

Use it as one input, not the answer

The Graham Number is a conservative sanity check, not a full valuation. Pair it with a forward-looking method like discounted cash flow, and always demand a margin of safety below your estimate.

Let Moatly do the math

Moatly computes the Graham Number automatically for every stock and reconciles it with a DCF, sector multiples and Wall Street targets into one fair-value range and a Buy / Hold / Sell verdict. Try it on a classic value name like Johnson & Johnson (JNJ), or screen the market for stocks below fair value with the screener.