By Maksym Lytvynov, Founder of AlphaStocks | Last updated: March 2026
Graham Fair Value: How to Estimate a Stock's Intrinsic Worth
The formula fits on one line: sqrt(22.5 × EPS × BVPS). Benjamin Graham published it in The Intelligent Investor(1949) as a ceiling price for conservative stock buyers. Seventy-seven years later, that single equation — and the margin-of-safety thinking behind it — still anchors how AlphaStocks estimates what a stock is actually worth.
The Graham Number Formula
The classic Graham Number estimates intrinsic value from two inputs: earnings per share (EPS) and book value per share (BVPS):
Graham Number = sqrt(22.5 × EPS × BVPS)The constant 22.5 is not arbitrary. Graham suggested that a defensive investor should not pay more than 15 times earnings (P/E ≤ 15) or more than 1.5 times book value (P/B ≤ 1.5). Multiplied together: 15 × 1.5 = 22.5. The square root converts this product into a per-share dollar value that can be compared directly to the stock price.
Example:A company with EPS of $5.00 and BVPS of $40.00 yields a Graham Number of sqrt(22.5 × 5 × 40) = sqrt(4,500) = approximately $67.08. If the stock trades at $55, it is priced below the Graham Number, suggesting a potential margin of safety.
The Margin of Safety
Graham's most important contribution to investing may not be the formula itself but the concept of margin of safety: the idea that you should only buy a stock when its market price is substantially below your estimate of intrinsic value.
This buffer protects you against three kinds of risk: errors in your assumptions, deterioration in the business after you buy, and general market downturns. Graham typically recommended a margin of safety of 30% to 50%, meaning you would only consider buying a stock if it trades at 50% to 70% of the calculated intrinsic value.
On AlphaStocks, the Graham-style fair value model produces three scenarios — conservative, base, and optimistic — each with a different margin of safety baked in.
Sector-Specific Adaptations
Graham's formula was designed for industrial companies of the mid-20th century. Applying it unchanged to a modern REIT, a commercial bank, or a software company produces misleading results. AlphaStocks addresses this with seven sector-specific scoring profiles:
| Sector | Adaptation |
|---|---|
| REITs | Uses FFO (Funds From Operations) instead of EPS, since REITs have large non-cash depreciation charges that distort traditional earnings |
| Banks | Adjusts book value for loan loss reserves and uses net interest margin as a profitability input |
| Utilities | Increases weight on dividend sustainability and rate-regulated earnings stability |
| Insurers | Accounts for float-based business model where traditional leverage metrics behave differently |
| Asset Managers | Adapted for AUM-driven revenue that fluctuates with market conditions |
| General | Standard Graham Number with EPS and BVPS as described above |
The EV/EBITDA Fallback
For some companies, the Graham Number produces a fair value estimate that diverges dramatically from what other valuation methods suggest. This is common with asset-light businesses that have minimal book value but strong cash flow generation.
When the gap between the Graham-based estimate and an EV/EBITDA-based estimate exceeds 60%, AlphaStocks activates a fallback mechanism that blends both approaches. This prevents a single model from producing extreme outlier valuations.
Additionally, a confidence gate at 80% ensures that fair value estimates are only displayed when the underlying data is sufficient and the signals are consistent. If confidence falls below this threshold, the estimate is suppressed rather than displayed with misleading precision.
Role in the Composite Score
The Graham fair value model contributes 45% of the Value axis, which itself carries 15% of the total composite. In absolute terms, Graham's model accounts for approximately 6.75% of the final score.
It is deliberately weighted alongside two other valuation approaches — Lynch PEG analysis (25%) and Greenblatt Magic Formula (30%) — so that no single valuation method dominates. A stock that appears cheap by Graham's standards but expensive by earnings yield and PEG will receive a moderate Value score, not a high one.
Limitations
The Graham Number requires positive EPS and positive BVPS. For companies with negative earnings or negative book value (some high-growth tech firms, for example), the formula cannot produce a meaningful result. AlphaStocks falls back to alternative valuation methods in these cases.
Book value itself can be misleading. Companies with large intangible assets (brand value, intellectual property, customer relationships) often have book values that significantly understate their economic worth. Conversely, companies carrying legacy assets at inflated book values may appear cheaper than they are.
These are not flaws in Graham's logic — they are limitations of any formula that relies on reported financial data. The most effective use of the Graham Number is as one data point within a broader analytical framework.
Related Guides
This article is for educational purposes only. AlphaStocks provides algorithm-generated research tools, not personalized investment advice. Fair value estimates are mathematical calculations based on historical financial data, not predictions of future stock prices. Past performance does not guarantee future results. Always conduct your own due diligence and consult a qualified financial adviser before making investment decisions. Data sourced from SEC EDGAR filings.