The Graham number or Benjamin Graham number is a figure used in
securities
A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any fo ...
investing that measures a
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
's so-called fair value. Named after
Benjamin Graham, the founder of
value investing
Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. The various forms of value investing derive from the investment philosophy first taught by Benjamin Graham ...
, the Graham number can be calculated as follows:
The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock. Put another way, a stock priced below the Graham Number would be considered a good value, if it also meets a number of other criteria.
The Number represents the
geometric mean
In mathematics, the geometric mean is a mean or average which indicates a central tendency of a set of numbers by using the product of their values (as opposed to the arithmetic mean which uses their sum). The geometric mean is defined as the ...
of the maximum that one would pay based on earnings and based on book value. Graham writes:
Alternative calculation
Earnings per share is calculated by dividing ''net income'' by ''shares outstanding''. Book value is another way of saying ''
shareholders' equity
In finance, equity is ownership of assets that may have debts or other liabilities attached to them. Equity is measured for accounting purposes by subtracting liabilities from the value of the assets. For example, if someone owns a car worth $ ...
''. Therefore, book value per share is calculated by dividing ''equity'' by ''shares outstanding''. Consequently, the formula for the Graham number can also be written as follows:
References
Valuation (finance)
Mathematical finance
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