Graham number
The Graham number is a rough maximum price per share: the square root of 22.5 times earnings per share times book value per share. It comes from the limits Benjamin Graham set for a defensive investor (a P/E no higher than 15 and a price-to-book no higher than 1.5, whose product is 22.5). It is a quick screen, not a valuation.
How it is calculated
A company with earnings per share of €2 and book value per share of €20: the square root of 22.5 × 2 × 20 = the square root of 900 = €30. If the share trades at €24 it passes the screen with a 20% margin; at €36 it does not. The 22.5 is the product of Graham’s two limits, a P/E of 15 and a price-to-book of 1.5, so the number amounts to requiring that the product of the two multiples not exceed 22.5.
The figures in the example are invented and rounded so the arithmetic can be redone by hand. They are not data from any real company.
What it is NOT
It is not the intrinsic value of the share nor a buy recommendation: it is a threshold for one specific profile, the defensive investor of 1949, in a market where book value said more than it does today. It leaves out almost any software or brand company, whose value is not on the balance sheet, and it can make companies with shrinking profits look cheap. With negative EPS or book value it does not exist: there is no square root of a negative number.
Formula
Graham number = √(22.5 × EPS × book value per share) See it on real data
Celsmar computes this from the accounts companies file with their regulator, and shows which line every figure comes from. Free to start, no card.
Definition for informational purposes. It is not financial advice nor a recommendation to buy or sell.