Graham Number Calculator

What Is the Graham Number?

The Graham Number is a stock valuation method that helps investors estimate a reasonable upper price for a stock based on its earnings and book value per share. It combines these two financial measures to provide a simple way to assess whether a stock's current market price may be high or low relative to its estimated value.

The method is associated with Benjamin Graham, one of the most influential figures in value investing. He emphasized the importance of analyzing a company's financial strength and buying stocks at prices that offer a margin of safety.

Investors can use the Graham Number to compare a stock's estimated value with its current market price. This comparison can help them identify stocks that may be worth researching further before making an investment decision.

Graham Number Formula

The Graham Number formula helps investors estimate the potential fair value of a stock based on its earnings and book value per share. It is associated with Benjamin Graham, a well-known investor who emphasized value investing and buying stocks at reasonable prices.

The formula combines a company's earnings per share (EPS) and book value per share (BVPS) to calculate an estimated price. Here is how the formula works:

Graham Number = √(22.5 x EPS x BVPS)

Where:

• EPS (Earnings Per Share): The amount of profit a company earns for each outstanding share.
• BVPS (Book Value Per Share): The company's net asset value per share, calculated using its total assets minus total liabilities.
• 22.5: A constant in the traditional formula, derived by multiplying a maximum price-to-earnings (P/E) ratio of 15 by a price-to-book (P/B) ratio of 1.5.

Example: How to Calculate Graham Number

Suppose a company has earnings per share of $10 and book value per share of $80. You can calculate its Graham Number as follows:

Graham Number = √(22.5 x 10 x 80)

Graham Number = √18,000

= $134.16

Based on these figures, the Graham Number is approximately $134.16 per share.

Investors can use this estimate as a reference when evaluating a stock's price. If the market price is below the calculated Graham Number, the stock may be worth further investigation. However, the result is not a guaranteed fair value or a recommendation to buy. It is most useful when evaluating established, profitable companies with positive earnings and book value.

How to Use the Graham Number Calculator

The Graham Number Calculator helps you estimate a stock's value using its earnings per share and book value per share. You can then compare the calculated value with the stock's current market price to assess whether it may be worth further research.

Follow these simple steps to use the calculator:

1. Enter the Current Stock Price: Enter the stock's current market price in dollars. This is the price at which one share is currently trading.
2. Enter Earnings Per Share (EPS): Enter the company's trailing twelve months (TTM) earnings per share. This represents the company's earnings for each outstanding share over the past 12 months.
3. Enter Book Value Per Share (BVPS): Enter the company's book value per share, which is calculated by dividing total shareholders' equity by the number of outstanding shares.
4. View the Graham Number: After entering the required values, calculate the result to see the stock's estimated Graham Number.
5. Compare the Results: Compare the Graham Number with the current stock price you entered. If the market price is below the Graham Number, the stock may be trading below this valuation benchmark. If the market price is above it, the stock may be trading at a premium according to this method.
6. Show the Calculation Breakdown (Optional): If you want to understand how the result is calculated, enable the "Show Calculation Breakdown" option, if available. This can help you follow the formula and see how the input values contribute to the result.

Frequently Asked Questions (FAQs)