Graham Number

What is the 'Graham Number'

The Graham number is a figure that measures a stock's fundamental value by taking into account the company's earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in. The formula is as follows:

graham-number.jpg



BREAKING DOWN 'Graham Number'

The Graham number is named after the "father of value investing," Benjamin Graham. It is used as a general test when trying to identify stocks that are currently selling for a good price. The 22.5 is included in the number to account for Graham's belief that the price to earnings ratio should not be over 15 and the price to book ratio should not be over 1.5 (15 x 1.5 = 22.5). It does leaves out many fundamental characteristics which make up a good investment, and is not effective for the majority of medium- to large-cap stocks.

For example, if the earning per share is $1.50, book value per share is $10, the Graham number would be 18.37. If the stock price is $16, you should buy the stock. If the stock price is $19, and you own it, you should sell the stock.

RELATED TERMS
  1. Benjamin Graham

    A scholar and financial analyst who is widely recognized as the ...
  2. Net Current Asset Value Per Share ...

    A value created by professor Benjamin Graham in the mid-twentieth ...
  3. Benjamin Method

    The investment approach that aims to follow the strategies implemented ...
  4. Mr. Market

    An imaginary investor devised by Benjamin Graham and introduced ...
  5. Book Value Per Common Share

    Book value per common share is a measure used by owners of common ...
  6. Asset Value Per Share

    The total value of a fund's investments divided by its number ...
Related Articles
  1. ETFs & Mutual Funds

    The 3 Most Timeless Investment Principles

    Benjamin Graham pioneered cutting edge concepts that propelled other top investors to fame.
  2. Managing Wealth

    The Intelligent Investor: Benjamin Graham

    Learn about the man who mentored Warren Buffett, who eventually became the investing "Oracle of Omaha".
  3. Markets

    Ben Graham's Advice on Reading Financial Statements

    Seven pieces of advice from Benjamin Graham on understanding financial statements.
  4. Investing

    Value Investing: Famous Value Investors

    The interesting thing about the value investors who have been especially successful is that they have all achieved extraordinary returns while investing different amounts of money in different ...
  5. Trading

    Take On Risk With A Margin of Safety

    More common risk theories can lead to missed opportunities. Find out how margin of safety can propel your portfolio.
  6. Investing

    Top 10 Must-Read Books for Finance Professionals

    Interested in the financial world? Here are some books that provide keen insight into its history and how it works.
  7. Trading

    Top 5 All-Time Best Mutual Fund Managers

    The best managers produced long-term, market-beating returns and helped investors build big nest eggs. Find out who made the cut.
  8. Investing

    5 Great Investors Who Aren't Warren Buffett

    Here are five other investors, not named Warren Buffett, that are also considered to be the best of the best in the industry.
  9. ETFs & Mutual Funds

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  10. Investing

    Stock-Picking Strategies: Value Investing

    Value investing is one of the best known stock-picking methods. In the 1930s, Benjamin Graham and David Dodd, finance professors at Columbia University, laid out what many consider to be the ...
RELATED FAQS
  1. How did Warren Buffett's investing style conflict with Benjamin Graham's theories ...

    Find out how Warren Buffett's value investing style contrasts with that of his mentor, Benjamin Graham, by relying on quality ... Read Answer >>
  2. Are university courses mandatory for being good at stocks?

    I am just a beginner and I am planning to major in computer science at university. But I also want to study stock exchange ... Read Answer >>
  3. What are Warren Buffett's favorite business / finance books, and why?

    Read the books that taught master investor Warren Buffet everything he knows about the market, stocks, security analysis ... Read Answer >>
  4. What does it mean if a share's market value is significantly higher than its book ...

    Learn how investors and analysts compare the market value of stock shares to the book value per common share; discover what ... Read Answer >>
  5. What is the difference between a company's book value per share and its intrinsic ...

    Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >>
  6. What is the average annual dividend yield of companies in the insurance sector?

    Discover why value investors purchase electronics stocks, which are highly sensitive to the business cycle, creating extremes ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center