Benjamin Graham's simple formula for finding undervalued stocks — and when to trust it.
In this lesson you'll learn
Who Benjamin Graham was and why his ideas endure
The Graham Number formula and how to calculate it
When the Graham Number is a reliable signal
The types of companies it does and doesn't apply to
Who was Benjamin Graham?
Benjamin Graham (1894–1976) is widely considered the father of value investing. His books — Security Analysis (1934) and The Intelligent Investor (1949) — became the foundational texts of fundamental investing. His most famous student, Warren Buffett, called him "the greatest investment mind of his time."
Graham's core philosophy: only buy a stock when its price represents a significant discount to its intrinsic value. He developed several quantitative tests for identifying such discounts, and the Graham Number is one of the simplest and most durable.
Graham's rules were designed for defensive investors — people who want to protect capital first and earn a return second. His methods are deliberately conservative, designed to filter out speculation and give a wide margin of safety.
The Graham Number formula
Graham's formula combines two key measures of a company's value into one number: its earnings power (EPS) and its asset value (Book Value Per Share).
The formula
Graham Number = sqrt(22.5 × EPS × Book Value Per Share)
Where 22.5 = 15 (max P/E) × 1.5 (max P/B)
EPS
$5.00
Trailing 12-month earnings per share
BVPS
$40.00
Book value per share (total equity / shares)
= Graham #
sqrt(22.5 × 5 × 40) = sqrt(4,500) ≈ $67.08
Upper limit of fair value
If the stock trades below $67.08, it meets Graham's defensive price threshold. If it trades above, Graham would consider it too expensive for a defensive investor.
Where the 22.5 comes from
Graham believed a defensive investor should never pay more than 15× earnings (P/E <= 15) or more than 1.5× book value (P/B <= 1.5). He combined these two limits into a single formula:
Max P/E of 15
At the time Graham wrote (1940s–1970s), 15× earnings was considered fair value for a stable business. Lower-risk, defensive stocks should never trade at a speculative premium.
Max P/B of 1.5
Graham liked companies trading near their tangible book value — what you'd receive if the company were liquidated. Paying no more than 1.5× this provides a floor.
15 × 1.5 = 22.5. The square root is taken because we're multiplying EPS and BVPS (which are in dollars), and we need the result to also be in dollars per share, not dollars squared.