Fundamental Analysis: Graham Number
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:
Graham Number = SQRT(22.5 * [Earnings Per Share] * [Book Value Per Share])
The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock. Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.
This number applies only to certain types of stocks in combination with a number of other criteria. The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.
As gracefully summarized in the seeking alpha's article:
Summarized from CHAPTER 14 of The Intelligent Investor - Stock Selection for the defensive Investor:
article by Serenity on seekingalpha.com
- Not less than $100 million of annual sales.
- Current assets should be at least twice current liabilities.
- Long-term debt should not exceed the net current assets.
- Some earnings for the common stock in each of the past ten years.
- Uninterrupted payments for at least the past 20 years.
- A minimum increase of at least one-third in per-share earnings in the past ten years.
- Current price should not be more than 15 times average earnings.
- Current price should not be more than 1-1⁄2 times the book value.
Most of these requirements could be easily monitored on stock2own web site via Growth Grade and financial ratios that available in Stock Analyzer. However, this is up to investor to check the numbers and decide if Graham Number can be used for any individual stock.