Graham Number Calculator

What is a Graham Number and Why Should You Care?

Ever wondered what the highest price you should pay for a stock is? That's where the Graham Number comes in handy. Named after Benjamin Graham, the father of value investing, the Graham Number helps you determine a stock's upper limit of fair value. It's like having a handy gauge to tell you, "Hey, maybe you're overpaying for that stock!"

But why should you care? Knowing the Graham Number helps investors make smarter decisions, reducing the risk of overpaying for stocks. By using this metric, you can identify undervalued stocks and potential investment opportunities. Isn't that what we're all after—maximizing returns while minimizing risks?

How to Calculate Graham Number

Calculating the Graham Number isn't rocket science; you just need a couple of pieces of data: the Earnings Per Share (EPS) and the Book Value Per Share (BVPS). Here's the formula:

[\text{GN} = \sqrt{22.5 \times \text{Earnings Per Share} \times \text{Book Value Per Share}}]

Where:

• Earnings Per Share (EPS) is the total earnings divided by the total number of shares
• Book Value Per Share (BVPS) is the total equity divided by the number of outstanding shares

To make things even easier, here's a step-by-step guide:

1. Find the Earnings Per Share (EPS): You can find this in the company's financial statements
2. Determine the Book Value Per Share (BVPS): Again, this info is often available in the company's financials
3. Plug these numbers into the formula

Calculation Example

Alright, let's get down to brass tacks and see how this works in real life.

1. Determine the Earnings Per Share (EPS): Suppose the EPS of a company is $5.00
2. Find the Book Value Per Share (BVPS): Imagine the BVPS is $4.00

Apply the formula:

[\text{GN} = \sqrt{22.5 \times 5.00 \times 4.00}]

So we multiply the numbers:

[\text{GN} = \sqrt{450}]

Now, take the square root of 450:

[\text{GN} \approx 21.21]

Voila! We get a Graham Number of approximately $21.21.

Why these numbers matter:

• EPS: If the company earns more per share, you generally have a more profitable investment
• BVPS: A higher book value per share often signifies more assets backing each share, making it potentially safer

By understanding and calculating the Graham Number, you can better assess a stock's investment potential. Think of the Graham Number as your stock market compass, guiding you towards more profitable and safer investment choices.