About Graham Number Calculator (Formula)
The Graham Number Calculator is a valuable financial tool used to estimate the intrinsic value of a stock or a company’s shares. Named after Benjamin Graham, the legendary investor and mentor to Warren Buffett, the Graham Number is a conservative valuation metric that helps investors determine whether a stock is undervalued or overvalued in the market.
The formula for calculating the Graham Number is relatively simple:
Graham Number (GN)=22.5×Earnings Per Share (EPS)×Book Value Per Share (BVPS)
- Earnings Per Share (EPS) represents the company’s earnings per share, which is essentially the profit attributed to each outstanding share of stock. It’s a measure of a company’s profitability.
- Book Value Per Share (BVPS) is the company’s total equity or net assets divided by the number of outstanding shares. It reflects the net worth of the company per share.
The formula combines these two fundamental metrics to estimate a stock’s intrinsic value. The 22.5 multiplier in the formula is derived from Graham’s philosophy of being conservative in valuations. A stock trading at or below its Graham Number may be considered undervalued, while one trading significantly above it might be overvalued.
Investors and analysts use the Graham Number to identify potential investment opportunities in the stock market. It’s particularly useful for value investors who seek stocks trading at a discount to their intrinsic value. By comparing a stock’s current market price to its Graham Number, investors can make more informed decisions about buying or selling shares.
However, it’s important to note that the Graham Number is just one of many valuation metrics, and it has its limitations. Market conditions, industry dynamics, and other factors can influence a stock’s price, so it should be used in conjunction with other analysis methods.
In conclusion, the Graham Number Calculator is a tool that embodies the principles of value investing, providing investors with a quantitative approach to assess the potential attractiveness of a stock based on its earnings and book value. It continues to be a valuable resource for investors seeking to make informed decisions in the world of finance.