Graham Formula & Graham Number Calculator
Estimate a stock's intrinsic value with Benjamin Graham's two formulas and see the margin of safety at today's price. The math runs in your browser; nothing you type is sent anywhere.
The Graham formula
V = EPS × (8.5 + 2g) × 4.4 / YGraham first published the formula as V = EPS × (8.5 + 2g) in 1962 and added the bond-yield adjustment when he revised it in 1974. The pieces:
- EPS is annual earnings per share. For cyclical businesses use a normalized, mid-cycle figure, not a peak year.
- 8.5 is the P/E Graham considered fair for a company with no growth.
- g is the expected annual earnings growth rate over the next 7 to 10 years, entered as a number (8 for 8%). Each point of growth adds two points of P/E.
- 4.4 / Yrescales for interest rates: 4.4% was the AAA corporate bond yield when Graham wrote, and Y is today's. Higher yields mean lower values.
Worked example:EPS $5.00, expected growth 8% and an AAA yield of 5.0% (an example, not today's rate) give V = 5 × (8.5 + 2 × 8) × 4.4 / 5 = 5 × 24.5 × 0.88 = $107.80. At a price of $90 the margin of safety is (107.80 − 90) / 107.80 = 16.5%.
The Graham Number
Graham Number = √(22.5 × EPS × BVPS)The Graham Number is a price ceiling for a defensive investor, not a growth estimate. Graham would pay no more than 15 times earnings and 1.5 times book value; 15 × 1.5 = 22.5, and the square root turns EPS × BVPS back into a price per share.
Worked example: EPS $5.00 and book value per share $40.00 give √(22.5 × 5 × 40) = √4,500 = $67.08. A $90 share price is 34% above it, so by this stricter test there is no margin of safety.
Assumptions and limitations
Positive earnings and equity only. Both formulas assume a profitable company with positive book value. The calculator refuses zero or negative EPS and BVPS rather than print a meaningless number.
The growth rate is a guess, and the formula amplifies it. Every point of g adds two points of P/E, so moving from 8% to 12% growth lifts the value by a third. Growth rarely persists for a decade; the calculator caps g at 25%, and anything above the mid-teens deserves skepticism.
Banks and financials. Their earnings swing with loan-loss provisions and their book value is leveraged many times over, so neither formula captures their risk. Price-to-book against return on equity is a better starting point.
Cyclicals. A peak-year EPS for a steelmaker or a chipmaker produces a flattering value just before earnings fall. Use average earnings across a full cycle.
Asset-light companies. Software and brand-driven businesses carry little book value, so the Graham Number understates them.
A formula output is an estimate with a wide range around it, not a price target. Treat it as a starting point for research.
Frequently Asked Questions
What is Benjamin Graham's formula for intrinsic value?
In the version he revised in 1974, Graham valued a growth stock as V = EPS × (8.5 + 2g) × 4.4 / Y: earnings per share, times 8.5 (the P/E he gave a company with no growth) plus twice the expected annual growth rate over the next 7 to 10 years, scaled by 4.4 (the AAA corporate bond yield at the time) divided by the current AAA yield.
What is the difference between the Graham formula and the Graham Number?
The Graham formula capitalizes earnings and rewards expected growth. The Graham Number, √(22.5 × EPS × BVPS), ignores growth and asks the most a defensive investor should pay given P/E ≤ 15 and P/B ≤ 1.5. The first estimates value; the second is a conservative price ceiling.
Which AAA bond yield should I use for Y?
Use the current yield on AAA-rated corporate bonds, in percent. A common public source is Moody's Seasoned Aaa Corporate Bond Yield, published by the Federal Reserve Bank of St. Louis (FRED series AAA). A higher yield lowers the value, because a safe bond becomes a better alternative to the stock.
Why does the calculator reject negative EPS or book value?
Both formulas describe profitable companies with positive equity. With losses, the Graham formula would return a negative value, and the Graham Number would take the square root of a negative number, or of a positive product of two negatives, which is meaningless. Such companies need a different valuation method.
Related
This calculator is for educational purposes only and is not investment advice. Its results depend entirely on the inputs you choose. AlphaStocks is not a registered investment adviser. Do your own research and consult a qualified financial adviser before making investment decisions.