Graham number
{{Short description|Calculated number representing the hypothetical value of a stock}}
{{Distinguish|Benjamin Graham formula}}
{{About|the investing term named after Benjamin Graham|the large number named after Ronald Graham|Graham's number}}
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value.[http://www.investopedia.com/terms/g/graham-number.asp Investopedia: Definition of 'Graham Number'] Named after Benjamin Graham, the founder of value investing, the Graham number can be calculated as follows:
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 meets a number of other criteria.
The Number represents the geometric mean of the maximum that one would pay based on earnings and based on book value. Graham writes:{{cite book |last=Graham |first=Benjamin |title=The Intelligent Investor |author2=Jason Zweig |date=1986-01-01 |publisher=HarperCollins |others=Warren E. Buffett (collaborator) |isbn=0-06-055566-1 |edition=1986 |page=[https://archive.org/details/harrypotter halfb00rowl_0/page/389 389] |chapter=14 |author-link=Benjamin Graham |chapter-url=https://archive.org/details/harrypotterhalfb00rowl_0/page/349 |orig-year=1949 |chapter-url-access=registration}}
{{Quote|text=Current price should not be more than 1{{frac|1|2}} times the book value last reported. However a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1{{frac|1|2}} times book value. It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)|sign=Benjamin Graham|source=The Intelligent Investor, chapter 14}}
Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows: