Our smart Graham number calculator helps you calculate a stock's fair value by using the most recent earnings per share and book value per share. In this article, we will cover:
- What the Graham number is in investing.
- How to calculate the Graham number.
- How to use our Graham number calculator.
- What is a good Graham number?
As a bonus, we will explore a real-life successful investing example.
What is the Graham number?
Graham number is an investing metric that puts together the current earnings per share (EPS) and the book value per share to obtain a stock price value.
Benjamin Graham suggested that if investors trade a stock at a price under its Graham number, then the stock is undervalued. Contrarily, if the stock trades over its Graham number, it is overvalued.
Consequently, we can consider the Graham number as the intrinsic value which other more sophisticated investors calculate through the discounted cash flow method.
It is essential to notice that the fair value of a stock will rise if the EPS grows. If the EPS grows, the more the retained earnings will be for a company; thus, shareholders' equity will increase too. But hey, everything starts with the revenue growth. Do not forget!
In the chart below, you can see how the intrinsic value (which you can obtain without the Graham number calculator) is between a range of several stock prices, making the stock overvalued or undervalued.
How to calculate the Graham number
As we now have a rough idea of what the Graham number is, let's discuss how it is computed in more detail. Graham number formula is relatively easy:
- – Graham number;
- – Earnings per share; and
- – Book value per share.
It is important to verify the main two requirements for using the Graham number formula:
Price earnings (PE) ratio shall be below or equal to
15, and price to book (PB) ratio shall be below or equal to
PE ratio × PB ratio shall be below or equal to
Furthermore, our Graham number calculator also helps you determine the per-share value in case you don't have them. Click in the
advanced mode button and fill in the following values:
Common outstanding shares: You will find it in the income statement.
Common shareholders equity: Available in the balance sheet.
TTM net income to common stockholders: You will find it in the income statement too.
You will see how our tool automatically calculates the per-share values.
Graham number – Real life examples
We are going to cover TD Synnex corporation for this example. Before the 2020, 2nd quarter, Synnex was trading at a:
- PE ratio = 9.2
- PB ratio = 1.3
Before the report, the trailing twelve months (TTM) available information was:
- Earnings per share TTM = 10.47 USD/share
- Book value per share = 75.82 USD/share
Because the PE ratio was under 15 and the PB ratio was under 1.5, we can use the Graham number formula to calculate the fair value of the stock.
Our Graham number calculator indicates that the fair value for TD Synnex corporation at that moment was 133.65 USD per share. Was it undervalued or overvalued?
On June 19th, the stock price was 101.80 USD per share, meaning a potential upside of 31%. The stock eventually spun off, releasing its subsidiary Concentrix and making it a public traded company. Shareholders who had Synnex stocks received shares of Concentrix. Up to date (December 14th, 2021), an investment in Synnex, when the stock was trading at 101.8 USD, has returned 172%.
Shortcomings of the Graham number
Whenever this doesn't apply, we suggest you explore another valuation method:
- EBITDA multiple – You could use this method whenever the company has positive EBITDA or for companies in which depreciation and amortization greatly affect their net income results.
- EV to sales – We recommend using it when companies do not generate positive operating income or cash flows yet.
So, if you bought a stock at a higher price than the Graham number, you can consider the other valuation methods we have, as well as its price/earnings to growth ratio. If you are still uncomfortable with the price, you can sell a fraction of your investment to reduce risk or buy more and reduce your cost basis.
How do I calculate Graham number for stocks?
To calculate Graham number for stocks, follow these steps:
- Calculate the earnings per share (EPS). It is the result of the net income divided by the outstanding shares.
- Calculate the book value per share (BVPS). You will need to divide common shareholders' equity by the outstanding shares.
- Get the square root of the result of 22.5 × BVPS × EPS. Also, you can use our handy Graham number calculator to make your life more simple.
What is a good Graham number?
A good Graham number is the one that is above the current stock price because it signals a possible profit. Just keep in mind we need to fulfill two main conditions for using the Graham number formula: First, price to earnings (PE) ratio below 15, and price to book (PB) ratio below 1.5; or the result of PE × PB under 22.5.
What is a bad Graham number?
Value investing requires paying a fair price for the stock, which would minimize your drawdown risk in case of a bear market. Our Graham number calculator relates the current earnings per share and the book value to recommend a stock price. Consequently, there cannot be a wrong Graham number, only bad acquisition prices.
Is Graham number still useful today?
Benjamin Graham developed the Graham number concept when interest rates were higher; thus, stock valuations were tighter. At that time, it was easier to find companies with PE and PB ratios below 15 and 1.5, respectively. Nowadays, it is harder to find companies that trade around those metrics, but the example above is still not impossible.