Long before spreadsheets, Benjamin Graham wanted a number a careful investor could compute in seconds to check whether a stock was obviously overpriced. The Graham number is that shortcut — a fair-value ceiling built from just two figures, earnings and book value. It is deliberately crude, and understanding both its logic and its narrow range of use is the whole point.
Two inputs, one ceiling price
The formula is the square root of 22.5 × EPS × book value per share. The 22.5 is not arbitrary: Graham held that a defensive stock should cost no more than 15× earnings and 1.5× book value, and 15 × 1.5 = 22.5. Multiplying the two per-share figures and taking the root blends profitability and asset backing into a single conservative price. Pay below it and you have a margin of safety on both measures at once.
Enter EPS and book value per share to get the Graham number, then compare it with the market price to see the implied margin of safety — or the overpricing.
A fast-growing, asset-light software company trades at three times its Graham number. What is the most sensible interpretation?
Graham ka jhat-pat fair-value: √(22.5 × EPS × book value per share). EPS ₹50, book ₹200 → √225000 ≈ ₹474. Isse bahut neeche daam = margin of safety; bahut upar = numbers se zyada keemat. Par yeh growth ko ginta hi nahi — achhi tezi se badhti company ko galti se "mehenga" bata dega. Sirf stable, asset-heavy, kamaane wali company pe chalao — sanity check hai, target price nahi.
- The Graham number is a conservative fair-value ceiling from EPS and book value per share.
- Formula: √(22.5 × EPS × BVPS), where 22.5 = Graham’s 15× earnings and 1.5× book.
- It is a quick sanity check for obvious overpricing, not a target price.
- It ignores growth, so it wrongly calls quality compounders expensive.
- Use it only on stable, asset-heavy, consistently profitable companies.
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Common questions
Short, direct answers to what people ask about this topic.
- what is the graham number
- The Graham number is a simple estimate of the maximum price a defensive investor should pay for a stock, devised by Benjamin Graham, the father of value investing. It is built from just two figures — earnings per share and book value per share — and produces a rough fair-value ceiling. The idea is to combine a company’s profitability and its net asset backing into one conservative number, so that paying below it gives a margin of safety. It is deliberately crude: a quick screen for obvious overpricing, not a precise valuation.
- how do you calculate the graham number
- The Graham number is the square root of 22.5 times the earnings per share times the book value per share. The 22.5 comes from Graham’s rule of thumb that a defensive stock should trade at no more than 15 times earnings and 1.5 times book value, and 15 × 1.5 = 22.5. For example, with an EPS of ₹50 and a book value per share of ₹200, the Graham number is √(22.5 × 50 × 200) = √225000 ≈ ₹474. A price meaningfully below that suggests the stock is not obviously expensive on these two measures.
- what does the graham number tell you
- It tells you a conservative ceiling price for a defensive investor: if the market price is well below the Graham number, the stock is cheap on the combined basis of earnings and asset backing; if it is well above, the stock is priced for more than its current profits and book value justify. It is best read as a quick filter — a yes/no on whether a stock is in obviously expensive territory — rather than a target price. It says nothing about growth, quality or the future, only about the here-and-now numbers.
- what are the limitations of the graham number
- The Graham number ignores growth entirely, so it systematically undervalues fast-growing and high-quality companies whose worth lies in future earnings, not current book value. It also breaks for asset-light businesses with little book value and for firms with negative or erratic earnings, and it treats book value as meaningful when accounting can distort it. It suits stable, asset-heavy, profitable companies of the kind Graham analysed, and it is a sanity check rather than a valuation — useful for spotting obvious overpricing, useless for judging a great growth business.