Benjamin Graham's Simplest Valuation Tool
Benjamin Graham, Warren Buffett's teacher and the father of value investing, developed a simple formula to estimate the intrinsic value of a stock that any investor could calculate with pencil and paper. The Graham Number combines earnings power and asset value into one defensible price target.
Graham Number = √(22.5 × EPS × Book Value Per Share)
The constant 22.5 comes from Graham's principle that a stock should trade at no more than 15x earnings AND no more than 1.5x book value simultaneously. 15 × 1.5 = 22.5.
If a stock's current price is below the Graham Number, it is trading at a potential margin of safety. If it's above, Graham would say you are paying for future expectations, not present reality.
A Practical Indian Example
Consider a mid-cap manufacturing company with:
- EPS: ₹42
- Book Value Per Share: ₹280
Graham Number = √(22.5 × 42 × 280) = √(264,600) = ₹514
If this stock trades at ₹380, it trades at a 26% discount to the Graham Number - a classic value opportunity by Graham's framework.
If it trades at ₹720, it is 40% above the Graham Number - implying the market is pricing in significant future growth that has not yet materialised.
Why the Graham Number Works in India
India's market has a large mid and small-cap segment where institutional coverage is thin. Mispricing is more common. The Graham Number is an effective first-pass filter to identify stocks where the market may be excessively pessimistic.
Several academic studies of Indian markets from 2000–2020 show that portfolios constructed using Graham-screened stocks (price below Graham Number, ROE > 10%) outperformed the Nifty 500 by 4–6% annually on a risk-adjusted basis. The effect was strongest in the 2008–2010 recovery period and the 2020 COVID recovery.
Where It Breaks Down
High-growth technology and consumer businesses: A software company with asset-light operations will have low book value. The Graham Number will be depressed - flagging the stock as "expensive" even when the growth rate justifies the premium. Graham himself acknowledged this limitation. His framework was designed for industrial-era businesses with significant tangible assets.
Financial companies: Banks and NBFCs have book value as a core concept (franchise value is measured in multiples of book). But their EPS is not comparable to an industrial company's EPS. Use Price-to-Book and ROE decomposition for financials instead.
Negative book value: Several asset-light service companies show negative book equity due to buybacks or goodwill write-downs. The Graham Number is undefined in these cases.
Combining Graham with Modern Metrics
The most practical application is using the Graham Number as a ceiling, not a precise target. A stock trading below the Graham Number is a candidate for deeper analysis. A stock trading at 3x the Graham Number needs an exceptional growth story to justify the price.
Intrynsic's Valuation tool shows both the Graham Number and the DCF-based intrinsic value side by side for every NSE stock. The combination gives you two independent reference points: one asset/earnings based (Graham), one cash-flow based (DCF). When both point in the same direction, conviction increases.
The Single Most Useful Application
Use the Graham Number as a maximum price filter, not a buy trigger. Never pay more than 1.5x the Graham Number without a clear, well-reasoned growth thesis. That discipline alone eliminates most value traps and prevents the worst outcomes in a portfolio.