Definition:
The Graham Number is a conservative, intrinsic-value formula created by Benjamin Graham (the father of value investing) to estimate the maximum fair price an investor should pay for a stock based on its earnings and book value.
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🔢 Formula
\text{Graham Number} = \sqrt{22.5 \times EPS \times BVPS}
Where:
• EPS = Earnings Per Share
• BVPS = Book Value Per Share
• The constant 22.5 = (P/E ratio limit of 15) × (P/B ratio limit of 1.5), representing Graham’s conservative valuation rule.
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💡 Interpretation
• If a stock’s current price < Graham Number, it may be undervalued.
• If it’s above, it may be overvalued, assuming stable earnings and accounting accuracy.
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📊 Example
Suppose a company has:
• EPS = ₹50
• BVPS = ₹400
Then,
\text{Graham Number} = \sqrt{22.5 \times 50 \times 400} = \sqrt{450,000} ≈ ₹671
If the stock trades at ₹550, it’s below the Graham Number — potentially a value buy.
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🧠Key Takeaways
• A quick check for value investors.
• Works best for stable, non-cyclical companies.
• Doesn’t account for future growth or qualitative factors.
• Part of Graham’s broader philosophy of “Margin of Safety.”
Regards
Shining Stars 🌟🌟🌟
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