The Graham Number Formula, Explained
Benjamin Graham's back-of-the-envelope ceiling for what a defensive investor should pay. Here's the formula, where the mysterious 22.5 comes from, and how to use it.
Quick answer
The Graham Number is the maximum price a defensive investor should pay for a stock: the square root of 22.5 × EPS × book value per share. The 22.5 comes from Benjamin Graham's two ceilings — a P/E of 15 and a price-to-book of 1.5. A price below the Graham Number signals a statistical bargain.
Benjamin Graham — the father of value investing and Warren Buffett's teacher — wanted a quick, conservative test for whether a stock was a statistical bargain. The result is the Graham Number: an estimate of the maximum price a defensive investor should pay for a stock, built from just two figures.
The formula
Graham Number
√( 22.5 × EPS × Book Value per Share )
That's it: multiply earnings per share by book value per share, multiply by 22.5, and take the square root. If the stock trades below the result, it may be undervalued on a deep-value basis; if it trades above, Graham would say a defensive investor is paying too much.
Where does 22.5 come from?
This is the part everyone asks about. In *The Intelligent Investor*, Graham suggested two ceilings for a defensive stock: a price-to-earnings ratio no higher than 15, and a price-to-book ratio no higher than 1.5. Multiply those two limits together — 15 × 1.5 — and you get 22.5. The Graham Number simply bakes both caps into a single figure.
It's a ceiling, not a target
The Graham Number tells you the most you should pay, not what the business is worth. A price below it is a starting point for research, not an automatic buy — a cheap price on a deteriorating business is still a bad investment.
A quick example
Run this on a real stock — free
Skip the spreadsheet. Valuo computes this for any US ticker: intrinsic value, buy price, and margin of safety.
Analyze a stock freeSay a bank earns $5.00 in EPS and has $40 of book value per share. The Graham Number is √(22.5 × 5 × 40) = √4,500 ≈ $67. If the stock trades at $55, it's below its Graham Number — a classic deep-value signal worth investigating. At $85, it fails Graham's defensive test.
Where it works — and where it doesn't
- Works well for profitable, asset-heavy, stable businesses — banks, insurers, industrials — where book value is meaningful.
- Breaks down for companies with negative earnings or negative book value (the formula needs both to be positive) — the math simply doesn't apply.
- Understates asset-light compounders. A software firm with little book value can be a wonderful business the Graham Number will always call 'expensive.' That's a feature of a deliberately conservative, tangible-asset test, not a verdict on quality.
This is exactly why Valuo never relies on a single framework. The Graham Number is one of four lenses — alongside Buffett's DCF, Lynch's PEGY, and Phil Town's Rule #1 — so an asset-light business isn't unfairly dismissed and an asset-heavy one gets the deep-value check it deserves.
See it computed
Valuo calculates the Graham Number for any US ticker automatically and flags whether the current price sits above or below it. Browse the most undervalued Graham stocks or read the full methodology.
Frequently asked
- What is the Graham Number formula?
- The Graham Number equals the square root of (22.5 × earnings per share × book value per share). A stock trading below this figure may be undervalued by Benjamin Graham's deep-value criteria.
- Why is the Graham Number multiplied by 22.5?
- 22.5 comes from Graham's two ceilings for a defensive stock: a maximum P/E of 15 and a maximum price-to-book of 1.5. Multiplying 15 by 1.5 gives 22.5, so the formula bakes both limits into one number.
- What are the limitations of the Graham Number?
- It requires positive earnings and positive book value, so it can't be computed for unprofitable companies. It also understates asset-light businesses like software, where book value is small relative to the company's true worth.
Apply it to a stock
Keep reading
How to Calculate Intrinsic Value Like Warren Buffett
A plain-English walkthrough of the discounted cash flow (DCF) method Warren Buffett uses to estimate a stock's intrinsic value — with the formula, the inputs, and a worked example.
The PEGY Ratio: Peter Lynch's Growth-at-a-Reasonable-Price Metric
What the PEGY ratio is, how it improves on the PEG ratio by adding dividend yield, the formula, and how Peter Lynch used it to find reasonably priced growth stocks.
Educational Use Only · Not Financial Advice
Analysis, scores, valuations, and buy zones are derived from publicly documented investor frameworks (Buffett, Lynch, Benjamin Graham, Phil Town) for learning purposes only. They are not recommendations from licensed financial advisors. Past performance does not guarantee future results. Prices may be delayed up to 15 minutes. Always conduct your own research before making any investment decisions.