What Is the Graham Number? Formula, Example and Limits

Last updated Nov 2026.

The Graham Number is a quick back-of-the-envelope estimate of the most a cautious investor might pay for a share of a company, based only on its earnings and its book value. It's named after Benjamin Graham, the economist and investor often called the father of value investing, whose books Security Analysis and The Intelligent Investor shaped how generations think about price and value.

It's simple, which is both its appeal and its weakness. Here's how it works, a worked example with made-up numbers, and the traps that catch people.

The formula

Graham Number = √(22.5 × EPS × BVPS)

• EPS is earnings per share, usually the last 12 months.
• BVPS is book value per share: shareholders' equity (assets minus liabilities) divided by shares outstanding.
• 22.5 comes from Graham's rule of thumb that a defensive investor shouldn't pay more than 15 times earnings and 1.5 times book value. 15 × 1.5 = 22.5.

The idea: a stock trading below its Graham Number passes both tests combined; above it, you're paying more than Graham's conservative guideline.

A worked example (hypothetical)

Imagine "Maple Widgets Inc.", a made-up company:

• Net income over the past year: $50 million
• Shareholders' equity: $400 million
• Shares outstanding: 20 million

So:

• EPS = $50M ÷ 20M = $2.50
• BVPS = $400M ÷ 20M = $20.00
• 22.5 × 2.50 × 20.00 = 1,125
• √1,125 ≈ $33.54

If Maple Widgets traded at $28, it would be below its Graham Number, and a Graham-style screen would flag it for a closer look. At $45, it would be well above.

Note the word "look". The number is a filter, not a verdict.

How investors use it

• As a screen. Ranking a list of companies by price-to-Graham-Number ratio quickly surfaces those that look cheap on earnings and assets.
• As a sanity check. If you're considering a stock trading at five times its Graham Number, the formula at least forces you to ask what growth you're assuming.
• As a teaching tool. It shows how earnings and balance-sheet strength both feed into what a business might be worth.

The limits (and they're big)

1. It ignores growth and quality

A fast-growing company with high returns on capital will almost always trade above its Graham Number, and may still be fairly priced. A shrinking business can look cheap for years while its value erodes. The formula has no way to tell the difference.

2. Which EPS? Adjusted vs reported

Companies often publish "adjusted" earnings that exclude one-time costs, stock-based compensation or write-downs. Adjusted EPS is usually higher than reported (IFRS or GAAP) EPS, which inflates the Graham Number. Mixing the two across companies makes comparisons meaningless. Pick one basis and stick to it, and know which one your data source uses.

3. Currency and unit mismatches

Many Canadian-listed companies report in US dollars while their shares trade in Canadian dollars. If you plug USD earnings into a formula and compare the result to a CAD share price, you'll be off by the exchange rate. Some data providers also mix per-share figures with figures in thousands or millions. Screens built from bulk data are especially prone to this; always check outliers by hand against the company's financial statements (on SEDAR+ in Canada).

4. Book value isn't always real value

Book value includes intangible assets like goodwill from past acquisitions, which may not be worth anything in a downturn. Some investors use tangible book value (excluding goodwill and intangibles) for a more conservative figure. Meanwhile, asset-light businesses (software, services) have little book value even when they're very profitable, so they'll always look expensive by this measure.

5. Negative numbers break it

If either EPS or book value is negative, the formula has no real answer. A company with a loss this year simply drops out.

6. Sector differences

Banks and insurers are often analysed on book value, so the Graham Number can be more meaningful there. For utilities, REITs, or commodity producers with cyclical earnings, a single year's EPS can be badly misleading. Averaging EPS over several years, as Graham himself suggested for some tests, helps smooth this.

A few habits that help

• Use the same EPS basis for every company you compare.
• Convert everything to one currency.
• Consider multi-year average earnings for cyclical businesses.
• Treat a low price-to-Graham ratio as the start of research: read the annual report, check debt levels and look at why the market is pessimistic.

FAQ

What does 22.5 mean in the Graham Number?

It's 15 (a maximum price-to-earnings ratio) multiplied by 1.5 (a maximum price-to-book ratio), both from Benjamin Graham's guidelines for defensive investors.

Is a stock below its Graham Number a buy?

Not necessarily. It only means the price looks low relative to recent earnings and book value. Many such companies are cheap for good reasons.

Should I use adjusted or reported EPS?

Either can work as long as you're consistent. Reported (IFRS/GAAP) earnings are more conservative and standardised.

Can the Graham Number be used for growth stocks?

It usually isn't useful for them, because it ignores future growth and they tend to have low book value.

Where can I find EPS and book value for Canadian companies?

In the company's annual and quarterly financial statements, available on SEDAR+ and the company's investor relations site.

Educational only, not advice. The example company is fictional. This article doesn't recommend any security. — The Finance Coach