Using The Graham Number Correctly

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 [6] and [7] 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 of the past three years.
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.

Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor

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.

Graham Number = Square Root of (15 x 1.5 x EPS x BVPS)

Graham Number = Square Root of (22.5 x EPS x BVPS)

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.

Complete Procedure

The complete stock selection procedure recommended by Graham is far more elaborate.

1. Defensive

First a stock is checked against all seven criteria for Defensive investment above.

2. Enterprising

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.

Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor

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.

Chapter 15: Stock Selection for the Enterprising Investor, The Intelligent Investor

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.

Contemporary Relevance

Graham also included all information required to modernize his framework using current interest rates, as well as preceding inflation rates.

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".

To Conclude

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.


HI there. Thanks for all the information your provide in your site. I have a question. I have an investor account in Australia´s stock exchange.
I wonder if Graham methods are valid as-is in this (or any other) stock exchange. Of course, his philosophy and ideas will stand in any country, but my question is if the specific mathematics would work the same or will need some adjustment.
Regards, Carlos

Hello Carlos,

The only one of Graham's criteria that seems region-specific is #5 of the defensive criteria - a minimum increase of one third in per share earnings over the past 10 years.

The rate of inflation in the United States when these criteria were published was about 5% annually. If the rate of inflation and the market cycle in Australia over the last 10 years was significantly different from the late 60s and early 70s in the United States, this criteria may need some slight adjustment.

The other Defensive, Enterprising and NCAV criteria should not require any adjustment if applied in USD.

Number 4 above says:
4. Uninterrupted payments for at least the past 20 years.

Does this mean dividends for the past 20 years? What is payments referring to?


#4 refers to uninterrupted dividend payments for at least the past 20 years.

Thank you!

Hi there, Just wanted to send you a note of approval as I find your website quite informative. I am working through The Intelligent Investor at the moment and am writing chapter summaries as I do so. Your website has been a great resource throughout this process. Thanks!

There are going to be some enhancements this quarter to Serenity's final analysis of stocks.
Do keep checking in.

can you use the Graham original formula for private company with $15M annual revenue, $50M enterprise value?

Hello SK,

Yes, you can. But you would need to use Book Value instead of Enterprise Value, as well as the 6 other supporting qualitative criteria.

Thank you for your comment!

Hi, everyone,
Thank you very much for this site! My question is related to the difference between Enterprising and Defensive prices. My intuition suggests that Enterprising investor would accept higher risk and therefore higher price than Defensive investor (all other things equal). However, in all stocks I see the opposite, defensive price (Graham number) is always higher than enterprising price (Serenity number). This suggests that defensive investor would find certain stocks fairly (or bargain) priced which enterprising investor would consider over-priced. For example, DRW8.DE has Graham number = 98% of its current price ("fairly" priced), but Serenity number = 52% ("overpriced"). Am I missing something obvious here?

"There has developed the general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent, rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task."
Benjamin Graham, Chapter 4: General Portfolio Policy, The Intelligent Investor.
"The determining trait of the enterprising (or active, or aggressive) investor is his willingness to devote time and care to the selection of securities that are both sound and more attractive than the average. Over many decades an enterprising investor of this sort could expect a worthwhile reward for his extra skill and effort, in the form of a better average return than that realized by the passive investor."
Benjamin Graham, Introduction, The Intelligent Investor.

Dear nvladimus,

Thank you for your comment!

As can be inferred from the above quotes, Graham taught that returns were proportional to the "intelligent effort" one put into one's investments, and not the risk one undertook.

The Enterprising Price (Serenity №) in Graham's framework is therefore lower than the Defensive Price (Graham №) because such stocks are harder to find; such a portfolio requires more diversification as well.

Graham Resources