One of the most popular Value Investing strategies these days is an Intrinsic Value calculation that Benjamin Graham — Warren Buffett's mentor — did actually recommend.
Unlike the much touted Benjamin Graham Formula that he actually warned against, Graham actually did recommend the Intrinsic Value calculation now known as the Graham Number.
But again, there's a big difference between how this calculation was recommended and how it is being used today.
The number itself is simple enough, and can be derived from rule  and  of Graham's rules for Defensive stocks.
1. Not less than $100 million of annual sales.
2-A. Current assets should be at least twice current liabilities.
2-B. Long-term debt should not exceed the net current assets.
3. Some earnings for the common stock in each of the past 10 years.
4. Uninterrupted [dividend] payments for at least the past 20 years.
5. A minimum increase of at least one-third in per-share earnings in the past 10 years.
6. Current price should not be more than 15 times average earnings.
7. Current price should not be more than 1½ times the book value.
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.
Criterion #1 works out to $500 million today based on the increase in CPI / Inflation.
The optimum price for a Defensive quality stock can easily be derived from the last three lines and this price is known as the Graham Number.
Note: The "multiplier" Graham refers to is simply another term for the P/E Ratio.
The Graham Number is designed to quantitatively assess any stock, regardless of sector or industry.
For example, public utility companies that are typically low on earnings will need higher asset figures to be acceptable. Similarly, service sector companies that are typically low on assets will need higher earnings figures to be acceptable.
The most common misuse of the Graham Number today is that it's used in isolation almost everywhere, while the five other supporting criteria for Defensive stock selection are completely ignored.
An online search for Graham Number will bring up dozens of analyst reports recommending stocks based on the Graham Number alone.
Graham Numbers are also rarely calculated using the average earnings of the past three years now, even though Graham gave detailed explanations of how easy it was to manipulate a single year's earnings figure and why such averaging was essential.
The complete stock selection procedure recommended by Graham is far more elaborate.
First a stock is checked against all seven criteria for Defensive investment above.
If the stock fails to meet any one of the above criteria, it is then checked against the five criteria for Enterprising investment (below).
[For issues selling at earnings "multipliers under 10"]
1-A. Current assets at least 1½ times current liabilities.
1-B. Debt not more than 110% of net current assets.
2. Earnings stability: No deficit in the last five years covered in the Stock Guide.
3. Dividend record: Some current dividend.
4. Earnings growth: Last year's earnings more than those of 1966.
5. Price: Less than 120% net tangible assets.
Criterion #4 corresponds approximately to using the earnings figure of four years ago.
This second set of criteria gives us an optimum price for a stock meeting the above conditions (an Enterprising stock) as — the lower of 120% net tangible assets (book value), or 10 times Trailing EPS.
This Intrinsic Value formula is quite different from the Graham Number but is equally, if not more, valuable today.
3. NCAV / Net-Net
If a stock meets neither of the above groups of checks, it is finally checked against the last two criteria for investment as an Net Current Asset Value (NCAV / Net-Net) or bargain stock (below).
Bargain Issues, or Net-Current-Asset Stocks
...price less than the applicable net current assets alone - after deducting all prior claims, and counting as zero the fixed and other assets.
...eliminated those which had reported net losses in the last 12-month period.
This last set of criteria, for a stock that meets neither of the first two sets of criteria, gives us an NCAV stock. This is a stock selling for less than the value of its cash worth alone, and with positive earnings (no losses) in the last one year.
For a complete understanding of stocks and investing, a reading of The Intelligent Investor by Benjamin Graham is highly recommended. This is the book that Warren Buffett himself describes — in his 1986 preface to it — as "by far the best book about investing ever written".
Graham's various sets of criteria are a fine balance of checks. There's no point if a stock meets just some of the criteria in a group and doesn't meet others. For example, it's easy for a stock to show great asset figures while having too much debt.
In the end, choosing stocks that completely meet one of the latter two groups of Graham criteria is a far better approach, than investing in stocks that incompletely meet the Defensive criteria. Graham did allow for individual exceptions though, if the portfolio as a whole cleared all criteria for Defensive investment.
But using just a single year's Graham Number — which barely covers two of the seven Defensive criteria — is not only excessively simplistic, but also potentially dangerous.
To assess global equity markets today against all the above seventeen Graham rules, including the Graham Number, please see the Advanced Graham Screener.