What Is the Graham Number?
The Graham Number is a conservative estimate of a stock's fair value based on two fundamentals: earnings per share and book value per share. It is designed to show the highest price a defensive value investor might reasonably pay for a profitable, asset-backed business.
Benjamin Graham built the formula as a shortcut for combining two classic value rules: do not pay more than 15 times earnings and do not pay more than 1.5 times book value. Multiply those limits and you get 22.5.
If a company earns $4.00 per share and has book value per share of $20.00, the Graham Number is:
If the stock trades at $35, it sits below the Graham Number. If it trades at $50, it sits above it.
TL;DR: The Graham Number is a quick value-investing formula that blends the logic of the P/E ratio and price-to-book. It works best for mature, profitable companies with meaningful tangible assets. It is less useful for banks, REITs, asset-light software businesses, or companies with negative earnings.
Why the Graham Number Matters
Most valuation metrics look at only one dimension. The P/E ratio tells you how much investors pay for current earnings. The price-to-book ratio tells you how much they pay for net assets. The Graham Number combines both into one conservative ceiling.
That matters because a stock can look cheap on one metric and still be expensive on another. A company may have a low P/E because earnings are temporarily high. Another may have a low P/B because the market does not trust the asset base. The Graham Number forces both conditions to work together.
For value investors, it serves three practical purposes:
- Quick triage. It helps you sort a long stock list into likely-overpriced and potentially-undervalued names.
- Margin-of-safety discipline. It gives you a conservative reference point rather than encouraging optimistic fair-value guesses.
- Cross-check on Graham-style screens. If a stock also passes a classic value screen such as how to screen for value stocks, the Graham Number can help you judge whether the current market price still leaves room for upside.
The formula is not intrinsic value in the modern discounted cash flow sense. It is a blunt tool. That is exactly why it remains useful: it keeps the first pass simple and conservative.
How the Graham Number Is Calculated
The formula uses two inputs:
- EPS: earnings per share, usually trailing twelve months
- BVPS: book value per share
Why 22.5?
The number comes from Graham's defensive-investor guidelines:
- Maximum acceptable P/E = 15
- Maximum acceptable P/B = 1.5
So the Graham Number is just a compact way to say: "What stock price would satisfy both rules at once?"
Worked example
| Input | Value |
|---|---|
| EPS | $3.20 |
| Book value per share | $18.00 |
| Constant | 22.5 |
If the stock trades at $28, it is below the Graham Number and may deserve further research. If it trades at $41, it is above the Graham Number and may no longer meet a strict Graham-style value threshold.
This is why the formula is best used as a screening tool, not as a final buy decision.
How to Interpret the Graham Number
The interpretation is simple: compare the current market price to the formula's result.
| Price vs. Graham Number | What It Usually Suggests |
|---|---|
| Well below | Potential undervaluation, or the market sees real business risk |
| Near the number | Roughly fair on a conservative Graham-style basis |
| Well above | The stock is pricing in growth, intangibles, quality, or optimism beyond Graham's defensive rules |
The key word is conservative. A stock above its Graham Number is not automatically overpriced. Many excellent businesses trade above it for years because the formula does not fully capture brand strength, software economics, network effects, or exceptional returns on capital.
Where the Graham Number works best by business type
| Sector or business type | Usefulness | Why |
|---|---|---|
| Industrials | High | Tangible assets and steady earnings fit the formula well |
| Consumer staples | Medium to high | Mature profits and stable balance sheets make the output more reliable |
| Energy and materials | Medium | Asset-heavy, but cyclical earnings can distort the result |
| Banks and insurers | Medium | Book value matters, but sector-specific rules often work better than a generic Graham formula |
| REITs | Low | Funds from operations matter more than EPS and book value |
| Software and platform companies | Low | Intangible assets dominate, so book value understates business quality |
| Pre-profit biotech or hypergrowth stocks | Not useful | Negative or unstable earnings break the formula |
Context matters: The Graham Number is strongest for profitable, established companies with readable balance sheets. The farther you move toward asset-light or highly cyclical businesses, the weaker it becomes.
Graham Number vs. P/E and P/B
The Graham Number does not replace individual valuation metrics. It bundles them.
| Metric | What it measures | Main strength | Main weakness |
|---|---|---|---|
| P/E ratio | Price relative to earnings | Fast read on how expensive profits are | Ignores asset backing and debt structure |
| P/B ratio | Price relative to book value | Useful for asset-heavy businesses | Weak for asset-light businesses with valuable intangibles |
| Graham Number | Conservative fair-value ceiling using both EPS and BVPS | Enforces discipline across both earnings and assets | Too blunt for many modern business models |
That is why the formula is best treated as a first filter. After that, you still need to check profitability, leverage, margins, and business quality. In practice, the next step is often to add ROE, debt, and growth filters.
How to Use the Graham Number in ScreenerHub
ScreenerHub's value workflow already exposes the two building blocks behind the Graham Number: earnings-based valuation and book-value-based valuation. That means you can approximate a Graham-style screen directly in the product even without a dedicated Graham Number filter.
Graham-style screen setup
| Filter | Setting |
|---|---|
| P/E ratio | 0 - 15 |
| Price-to-book | 0 - 1.5 |
| Market cap | > $300M |
| Debt-to-equity | < 1.0 |
| Return on equity | > 8% |
This setup mirrors the spirit of Graham's formula: pay modest multiples, avoid fragile balance sheets, and focus on companies that still earn a reasonable return on capital.
<!-- [SCREENSHOT: ScreenerHub Studio - P/E ratio 0-15, Price-to-Book 0-1.5, Market Cap > $300M, Debt-to-Equity < 1.0, ROE > 8% configured in the filter panel] -->
-> Try a Graham-style value screen in ScreenerHub
For a fuller workflow, pair this article with the strategy page on systematically finding value stocks. That page goes beyond the formula and shows how to combine valuation with quality and financial-strength filters.
Common Mistakes When Using the Graham Number
- Treating it as intrinsic value down to the cent. The formula is a conservative shortcut, not a full valuation model.
- Using it on the wrong companies. Software, biotech, and REITs often look "expensive" only because the formula is a poor fit.
- Ignoring earnings quality. EPS can be temporarily inflated, cyclical, or accounting-driven.
- Ignoring balance-sheet quality. Book value is only useful if the assets are real and productive.
- Buying solely because price is below the number. A discount can reflect a genuine value trap rather than opportunity.
When the Graham Number Misleads
There are three especially common failure cases.
1. Negative or unstable earnings
If EPS is negative, the Graham Number breaks. If earnings swing wildly with the cycle, the output can change drastically from one year to the next. That makes the formula unreliable for turnaround stories and deep cyclicals.
2. Book value does not capture real business value
For software, marketplaces, and brand-heavy consumer companies, the most valuable assets often do not sit cleanly on the balance sheet. The formula then understates fair value and makes great businesses look perpetually overvalued.
3. Low quality assets create false comfort
A cheap price relative to book value is only comforting if the book value is economically meaningful. If assets are impaired, obsolete, or hard to monetize, the formula can give a false sense of safety.
This is why Graham himself paired valuation with financial strength and business stability. The formula was never meant to stand alone.
Frequently Asked Questions
What is a good Graham Number for a stock?
There is no universally good Graham Number in absolute terms because the number depends on a company's earnings and book value. What matters is the comparison between the current stock price and the Graham Number. A price below the number may indicate undervaluation, but only after you confirm the business is profitable, financially sound, and a good fit for the formula.
Why does the Graham Number use 22.5?
The 22.5 comes from multiplying Graham's defensive valuation limits: a maximum P/E of 15 and a maximum P/B of 1.5. The formula combines both thresholds into one constant so investors can estimate a conservative fair-value ceiling with a single calculation.
Is the Graham Number better than the P/E ratio?
Not better, just stricter. The P/E ratio looks only at earnings. The Graham Number also considers book value, which can be useful for mature, asset-backed businesses. For asset-light companies, the plain P/E ratio or other metrics such as EV/EBITDA are often more informative.
Can a stock trading above its Graham Number still be a good investment?
Yes. Many high-quality companies trade above their Graham Number because investors are paying for durable growth, high returns on capital, strong brands, or intangible assets. The formula is intentionally conservative, so it often rejects excellent businesses along with genuinely overpriced ones.