Using The Graham Number Correctly

One of the most popular Benjamin Graham methods these days is the Graham Number, which Graham did recommend (unlike the much touted Benjamin Graham Formula that he actually warned against).

But again, there is a big difference between how this calculation was recommended, and how it is being used today.

The Number

The number itself is simple enough, and can be derived from criteria [6] and [7] from Graham's calculations for defensive stocks.

Summarized from CHAPTER 14 of The Intelligent Investor - Stock Selection for the defensive Investor:
1. Not less than $100 million of annual sales.
[Serenity note: This comes to $500 million today based on the difference in CPI/Inflation from 1973]
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 ten years.
4. Uninterrupted payments for at least the past 20 years.
5. A minimum increase of at least one-third in per-share earnings in the past ten years.
6. Current price should not be more than 15 times average earnings.
7. Current price should not be more than 1-1⁄2 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.

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.

The problem however is that almost everywhere today, the other 5 supporting criteria for defensive stock selection are completely ignored.
An online search for "Graham Number" will bring up dozens of Stock Screeners and Analyst Reports recommending stocks based on the Graham number alone.

The Complete Procedure

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

Step 1. First a stock is checked against all 7 criteria for defensive investment above.

Step 2. If the stock fails to meet any one of the above criteria, it is then checked against the 5 criteria for Enterprising investment (below).

Summarized from CHAPTER 15 of The Intelligent Investor - Stock Selection for the Enterprising Investor:
[Serenity note: For issues selling at PE multipliers under 10]
1. Current assets at least 11⁄2 times current liabilities.
1. 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.
[Serenity note: This corresponds approximately to the earnings of 2007 today]
5. Price: Less than 120% net tangible assets.

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 current earnings.

This is a number quite different from the Graham Number but is equally, if not more, valuable today.

Step 3. If a stock meets neither of the above groups of checks, it is finally checked against the last 2 criteria for investment as an NCAV or "bargain" stock (below).

Summarized from CHAPTER 15 of The Intelligent Investor - Stock Selection for the Enterprising Investor:
"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 2 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 the Preface) 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. Just using the Graham Number, which satisfies only 2 of the 7 defensive criteria, is not only excessively simplistic, but also potentially dangerous.

To assess 5000+ U.S. stocks today against all the above 17 Graham rules — including the Graham Number — please see the Advanced Graham Screener.

Advanced Graham Screener

Customized Value Investing.


[Link to the original article by Serenity on Seekingalpha]


I emailed you concerning this issue, but did not get a satisfactory response. For NCAV, you appear to use Total Assets in your calculation. I have a copy of the Intelligent Investor in my hands, and Graham suggests using Total Current Assets only. (Thus the name "Net Current Assets Value". Can you comment on why you use Total Assets instead?

An additional issue. On your website, you list Good/Enterprising grade as calculated as the lower of 120% net tangible assets, or a PE of 9. Yet here in your article you quote a PE of 10. You need to clarify and fix these inconsistencies.


Hello keylay31,

First of all, thank you for your feedback!

Serenity calculates all Enterprising stocks using a PE of 10, as mentioned here, and on most places in the website. Any instance of the PE being mentioned as "9" is a content error and should already have been corrected. The content error will not affect the calculations in the database in any way. The PE for enterprising stocks has always been calculated using a value of 10.

Regarding your original query, as mentioned in the email reply, Serenity does not use Total Assets for calculating the NCAV value. Serenity's database does not even store Total Assets for a stock since it is not required for Graham's calculations.

Graham did recommended [Current Assets - Total Liabilities] for NCAV calculations, as you said, and that is what is used on Serenity's database too.

Hope this answers your questions.
Thank you for your time!


Hi Serenity,
Your website has indeed been updated and it's clear your LinkedIn and Facebook articles follow Graham by using Current Assets. The issue was my mistake. For AAPL, you list a "Last Updated" time of 1 day, yet the data is "Submitted by Serenity on Fri, 2012-06-22 01:49". When looking at AAPL's May NCAV, it is almost exactly the same as AAPL's November NTAV (Total Assets), by coincidence. Needless to say, its clear your calculations are accurate. Thank you for the service you are providing and the excellent clarity in this article.

I have this question about P/E. I agree that Graham has recommended a defensive investor a P/E < 13 and for an enterprising investor a P/E < 9. But if you read Chapter 13 stock selection for defensive investor on page 350 it says that. "Our basic recommendation
is that the stock portfolio, when acquired, should have
an overall earnings/price ratio—the reverse of the P/E ratio—at
least as high as the current high-grade bond rate. This would mean
a P/E ratio no higher than 13.3 against an AA bond yield of 7.5%."
If you consider the 10yr AA corporate bond yield as of 03/23/2015 it is 2.69% so the inverse is 37.17. So as of 03/23/2015 a defensive investor should consider stocks with P/E <37.17. From the reading it seems that graham was trying to make sure that the defensive investor get value to the risk he/she is taking compared to the bonds. I think the recommendation for P/E ratio for enterprising investor has also come from similar lines most probably the AAA bond yield for that year but I have not verified that. So i think the constant "22.5" in the graham number is actually a variable that is dependent on time. Please provide your feedback.

Hello cyberumao,

Thank you for an extremely insightful comment.
You're absolutely right in that Graham intended the figure 15 to vary as per prevailing bond yields.

Adjusting the Graham Number from a PE of 15 to a PE of 37 involves the following:

37÷15 = 2.467
√2.467 = 1.57

We would need to multiply the Graham Number of a stock by 1.57 to adjust it to a maximum PE of 37.

Serenity's default Graham analysis and Classic Graham Screener will continue to use 15 and 22.5 for the Graham analysis.
But you can use The Advanced Benjamin Graham Stock Screener to screen Defensive Graham stocks meeting the adjusted figure.

Please use the following filters to do so:
Sales | Size (100% ⇒ $500 Million): 100%
Current Assets ÷ [2 x Current Liabilities]: 100%
Net Current Assets ÷ Long Term Debt: 100%
Earnings Stability (100% ⇒ 10 Years): 100%
Dividend Record (100% ⇒ 20 Years): 100%
Earnings Growth (100% ⇒ 30% Growth): 100%
Graham Number ÷ Previous Close: 64%

And optionally:
Source (Analyzed by): Serenity

64% is used for the last filter (GN÷PC) because the reciprocal of 1.57 is 0.6367, or 63.67%.

Hope this answers your question!
Thanks again.

Great piece. I agree. I might add that using the Graham Number for financial stocks, seems not to work for me. (I don't understand banks).
Have you seen John Reese's results since 2003 using the complete 7 criteria screen? Check his site
Kind regards from Amsterdam.

Thank you, AnsgarJohn.

Validea does not use all of Graham's criteria, and does not adjust the ones it uses completely for inflation.
Please see the discussion on seekingalpha for details.

Thank you for using Serenity!
Please write back if you have more questions.

Serenity Support

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?


You are correct, PMoney.

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

Thank you!

Serenity Support

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!

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