Scores are algorithm-generated research tools, not investment recommendations.
Graham-Style Defensive Investor Criteria
By Maksym Lytvynov · Rules as of (v23)
Benjamin Graham's seven tests for the defensive investor, from chapter 14 of The Intelligent Investor, computed as he wrote them from SEC filings.
Score output: Strong / Attractive / Neutral / Reject / Insufficient data, with a 0–10 score
What is the Graham Score?
The Graham score checks a stock against the seven criteria Benjamin Graham set for the defensive investor in chapter 14 of The Intelligent Investor: adequate size, strong financial condition, an unbroken earnings record, an unbroken dividend record, earnings growth, a moderate P/E and a moderate price-to-book ratio. Each criterion passes or fails against Graham's own number, and the score is the share passed out of the criteria that can be evaluated. It is one of three models on the Value axis.
How does the Graham Score work?
The seven criteria, as the code evaluates them for an ordinary company: adequate size (annual sales ≥ $100M); strong financial condition (current ratio ≥ 2 and long-term debt ≤ net current assets); positive earnings every year (10 years); uninterrupted dividends (20 years); per-share earnings growth over ten years (≥ +33.3% (3-year averages, ten years apart)); moderate p/e on 3-year average earnings (≤ 15); moderate price to book value (P/B ≤ 1.5 or P/E × P/B ≤ 22.5).
Graham asks for long records, so the model reads up to twenty fiscal years of annual filings. A record that is clean for every year on file but shorter than Graham asks is reported as "record too short": it leaves the count, and is never a pass or a fail. A bad year inside the record is a fail.
The price tests use Graham's definition of earnings: the P/E divides today's price by the average EPS of the last three fiscal years, not by trailing twelve months, and the price-to-book test passes on P/B alone or on the product of P/E and P/B. Negative average earnings or negative book value make the ratio undefined, and undefined is a fail, never a cheap reading.
Chapter 14 sets no working-capital test for financial enterprises, so for banks, insurers, asset managers, holding companies and REITs criterion 2 is not applicable and the other six are evaluated. Utilities get Graham's own utility test instead: debt ≤ 2 × book equity.
What does Graham look for in a stock?
Each criterion as the scoring code evaluates it, with the threshold it uses and where that threshold comes from.
Adequate size
- Passes when
- annual sales ≥ $100M
- Applies to
- Every profile the model rates
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 1
Latest fiscal year's sales ≥ $100M, or total assets ≥ $50M for a utility — Graham's own figures. A financial company's sales are its total revenues (for a bank, net interest income + noninterest income), not its fee income alone. A company reporting in another currency is not set against a dollar floor.
Strong financial condition
- Passes when
- current ratio ≥ 2 and long-term debt ≤ net current assets
- Applies to
- General
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 2
Positive earnings every year
- Passes when
- 10 years
- Applies to
- Every profile the model rates
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 3
Uninterrupted dividends
- Passes when
- 20 years
- Applies to
- Every profile the model rates
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 4
Per-share earnings growth over ten years
- Passes when
- ≥ +33.3% (3-year averages, ten years apart)
- Applies to
- Every profile the model rates
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 5
Moderate P/E on 3-year average earnings
- Passes when
- ≤ 15
- Applies to
- Every profile the model rates
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 6
Moderate price to book value
- Passes when
- P/B ≤ 1.5 or P/E × P/B ≤ 22.5
- Applies to
- Every profile the model rates
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 7
Strong financial condition (public utility)
- Passes when
- debt ≤ 2 × book equity
- Applies to
- Utility
- Source
- The Intelligent Investor (rev. ed.), ch. 14, criterion 2
- P/E uses the 3-year average EPS, as criterion 6 is written — not trailing twelve months.
- Earnings growth compares 3-year average EPS 10 years apart, on split-adjusted history; a share-count jump no filing lets us adjust makes it unavailable rather than wrong.
- The 20-year dividend record is judged on the filings history we have and labelled with the years it covers.
- Graham Number = √(22.5 × 3-year average EPS × book value per share): the price at which criterion 7's P/E × P/B = 22.5 binds. Undefined unless both are positive. Shown on the model card; it is not the site's fair value.
How the Graham score maps to a status
| Status | Rule |
|---|---|
| Strong | 7 of 7 passed |
| Attractive | 5–6 of 7 passed |
| Neutral | 3–4 of 7 passed |
| Reject | 0–2 of 7 passed |
| Insufficient data | fewer than 5 criteria evaluable |
With fewer evaluable criteria the count is scaled to seven. The bands are ours; Graham gives the criteria, not a grade.
Which companies Graham rates
| Sector profile | Rated | Note |
|---|---|---|
| General | Yes | — |
| Bank | Yes | Criterion 2 (working capital) not applicable: ch. 14 sets no working-capital test for financial enterprises; the other six are evaluated. |
| Insurer | Yes | Criterion 2 (working capital) not applicable: ch. 14 sets no working-capital test for financial enterprises; the other six are evaluated. |
| Asset manager | Yes | Criterion 2 (working capital) not applicable: ch. 14 sets no working-capital test for financial enterprises; the other six are evaluated. |
| Holding company | Yes | Criterion 2 (working capital) not applicable: ch. 14 sets no working-capital test for financial enterprises; the other six are evaluated. |
| Utility | Yes | Criterion 2 uses Graham's utility test: debt ≤ 2 × book equity. |
| REIT | Yes | Criterion 2 (working capital) not applicable: ch. 14 sets no working-capital test for financial enterprises; the other six are evaluated. |
“Not applicable” means the model is left out of that company's axis — never scored as zero or as neutral.
How AlphaStocks uses Graham
Inside the Value axis the weights are Graham Defensive-Investor Criteria 45%, Lynch Categories and PEG 25%, Greenblatt Magic Formula 30% (general profile; the sector profiles shift them — see the methodology page). Only the models that apply to a company and have a score are averaged, re-weighted among themselves; a model that does not apply is left out, never counted as zero. The Value axis carries 10% of the composite. The Value axis also sets Timing (15%), which is the lower of Value and Momentum.
The Graham score is not the fair value shown on a stock page. That number comes from one Damodaran valuation method per sector profile, described on the main methodology page. The Graham Number is shown on the model card for reference.
Value = weighted mean of the applicable Value models (Graham 45%); composite weight of Value: 10%; Timing = min(Value, Momentum): 15%Current top stocks by Graham
The Graham-Style Defensive Investor Criteria model is evaluated for every stock in our coverage it applies to. You can filter the full rankings table to see which stocks currently score highest on this model and compare them across all five investment frameworks.
Frequently Asked Questions
What are Graham's seven criteria for the defensive investor?
From The Intelligent Investor, chapter 14: adequate size (annual sales ≥ $100M); strong financial condition (current ratio ≥ 2 and long-term debt ≤ net current assets); positive earnings every year (10 years); uninterrupted dividends (20 years); per-share earnings growth over ten years (≥ +33.3% (3-year averages, ten years apart)); moderate p/e on 3-year average earnings (≤ 15); moderate price to book value (P/B ≤ 1.5 or P/E × P/B ≤ 22.5). AlphaStocks evaluates each from annual SEC filings and scores the share passed.
Why does a stock show "record too short" on Graham?
Graham asks for ten years of earnings and twenty years of dividends. SEC XBRL filings rarely go back twenty years, so a record that is clean for every year on file but shorter than required is reported as too short. It is left out of the count rather than scored as a pass or a fail.
Is the Graham Number the fair value on AlphaStocks?
No. Graham Number = √(22.5 × 3-year average EPS × book value per share): the price at which criterion 7's P/E × P/B = 22.5 binds. Undefined unless both are positive. Shown on the model card; it is not the site's fair value. The fair value on each stock page comes from one Damodaran method per sector profile.
How does the Graham model treat banks and utilities?
Graham set no working-capital test for financial enterprises, so banks, insurers, asset managers, holding companies and REITs are judged on the other six criteria. Utilities use his utility test: debt ≤ 2 × book equity.
Why do most growth stocks fail the Graham criteria?
Because Graham wrote them for a defensive investor: ≤ 15 on three-year average earnings and P/B ≤ 1.5 or P/E × P/B ≤ 22.5. A company priced for growth fails the price tests by design. Lynch and Greenblatt, the other Value models, look at price against growth and against return on capital.
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Every stock evaluated by Graham-Style Defensive Investor Criteria and four other investment models, from SEC filings. Changed in v23? See what changed and why.
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Model names reference the published investment methodologies of their respective authors. AlphaStocks is not affiliated with, endorsed by, or sponsored by Benjamin Graham or any related entities. Our implementation follows the cited sources; where it adapts them, the adaptation is named above.
AlphaStocks provides investment research and analysis, not investment advice. Past performance does not guarantee future results. Always do your own due diligence before making investment decisions. Data sourced from SEC EDGAR and Alpaca Markets.