Graham Number Calculator

The Graham Number represents a fundamental approach to value investing, emphasizing the intrinsic value of a stock based on its earnings and book value. This calculation methodology stems from Benjamin Graham, often referred to as the "father of value investing." Graham's principles of investing were focused on finding undervalued stocks with a margin of safety, where the Graham Number plays a crucial role.

Historical Background

Benjamin Graham introduced the Graham Number as part of his broader investment philosophy, emphasizing a quantitative approach to investment and the importance of an intrinsic value that provides a margin of safety. Graham's methods have deeply influenced the field of value investing.

Graham Number Formula

The Graham Number (\(GN\)) is calculated using the formula:

\[ GN = \sqrt{22.5 \times EPS \times BPS} \]

where:

• \(GN\) is the Graham Number,
• \(EPS\) is the earnings per share,
• \(BPS\) is the book value per share.

Example Calculation

For a stock with an EPS of $2 and a BPS of $50, the Graham Number would be:

\[ GN = \sqrt{22.5 \times 2 \times 50} \approx \$47.43 \]

Importance and Usage Scenarios

The Graham Number is a quick, fundamental analysis tool to estimate the maximum fair value of a stock. Investors use it to identify potentially undervalued stocks based on their earnings and book value. It's a conservative measure that focuses on financial stability and sustainability rather than market trends.

Common FAQs

1. What does the Graham Number indicate?

   • The Graham Number suggests the highest price at which a stock should be bought to ensure a margin of safety, according to Graham's principles of value investing.

2. How does the Graham Number relate to value investing?

   • It embodies the value investing philosophy by focusing on intrinsic value and a margin of safety, helping investors avoid overpaying for stocks.

3. Can the Graham Number be applied to all stocks?

   • While useful, the Graham Number is most applicable to companies with stable earnings and book values. It may not be suitable for high-growth companies or those in volatile sectors.

This calculator streamlines the process of computing the Graham Number, providing a valuable resource for investors seeking to apply the principles of value investing in their portfolio decisions.