Graham Formula: Definition, Formula, Example, and Limitations

The Graham Formula estimates a stock's intrinsic value using earnings and expected growth, originally developed by Benjamin Graham.

The idea is simple: if you can estimate what a business earns and how fast those earnings can grow, you can create a rough fair-value estimate. That makes the Graham Formula popular with value investors who want a fast, disciplined way to think about price versus value before moving on to deeper analysis. For the broader philosophy behind the formula, start with the Benjamin Graham Guide and Graham's place in value investing history at Columbia Business School.

What is the Graham Formula

The Graham Formula is a quick valuation method that uses earnings per share and expected growth to estimate a stock's intrinsic value.

If you searched for "graham formula," "graham's formula," "benjamin graham formula," or "graham intrinsic value formula," that is the direct answer. It is a shortcut valuation tool, not a full business appraisal.

In practical terms, the formula tries to answer this question:

• If a company earns a certain amount per share today,
• and those earnings can grow at a reasonable rate,
• what might one share be worth under a conservative Graham-style lens?

That is why investors still use the formula today. It is fast, easy to calculate, and useful for screening. But it also has limits, which matter just as much as the formula itself.

The Graham Formula Explained

The classic Graham Formula is:

V = EPS x (8.5 + 2g)

Where:

• V = estimated intrinsic value per share
• EPS = earnings per share
• g = expected annual earnings growth rate

Each part of the formula has a specific purpose.

EPS

EPS stands for earnings per share. It tells you how much profit belongs to each share of stock.

For example:

• Net income = $100 million
• Shares outstanding = 50 million
• EPS = $2.00

The formula uses EPS because Graham wanted valuation to start with actual earning power, not just price momentum or market excitement.

Growth rate (g)

g is the expected earnings growth rate, usually expressed as a percentage number in the formula.

Example:

• If expected growth is 5%, use g = 5
• If expected growth is 8%, use g = 8

This matters because higher growth assumptions raise the estimated value very quickly. That is one reason conservative investors should be careful. Small changes in growth can create large changes in value.

The constant 8.5

The 8.5 represents the price-to-earnings multiple Graham assigned to a no-growth company.

In plain English:

• a company with no growth still has some value,
• Graham used 8.5 as a baseline multiple,
• growth adds to that baseline through the 2g term.

So if a company has:

• EPS = 4
• g = 5

Then:

V = 4 x (8.5 + 2 x 5)
V = 4 x 18.5
V = 74

That gives an estimated intrinsic value of $74 per share.

For a broader Graham framework around earning power and quality of earnings, see Earnings Quality, Basic Earning Power, and the higher-level Benjamin Graham Guide.

What is the Graham Number

The Graham Number is a separate but related Graham-style valuation shortcut. The formula is:

Graham Number = sqrt(22.5 x EPS x Book Value Per Share)

You may also see it written as:

sqrt(22.5 x EPS x BVPS)

The purpose of the Graham Number is different from the main Graham Formula.

• The Graham Formula focuses on earnings plus growth.
• The Graham Number focuses on a conservative relationship between earnings and book value.

Why 22.5?

Because it comes from:

• 15 as a conservative P/E ceiling
• 1.5 as a conservative P/B ceiling
• 15 x 1.5 = 22.5

That makes the Graham Number a stricter and more balance-sheet-aware shortcut.

Example:

• EPS = 3
• Book Value Per Share = 20

Calculation:

Graham Number = sqrt(22.5 x 3 x 20)
Graham Number = sqrt(1350)
Graham Number = 36.74

If the stock trades at $28, it may look undervalued on this measure. If it trades at $50, it is above this conservative threshold.

How to Calculate the Graham Formula (Step-by-Step)

Here is the simplest way to calculate the Graham Formula.

1. Find the company's EPS.
2. Estimate a reasonable earnings growth rate.
3. Plug both values into V = EPS x (8.5 + 2g).
4. Compare the result with the current market price.

Step-by-step example

Assume:

• EPS = 3.20
• Expected growth rate = 4%

Now calculate:

V = 3.20 x (8.5 + 2 x 4)
V = 3.20 x (8.5 + 8)
V = 3.20 x 16.5
V = 52.80

Estimated intrinsic value = $52.80 per share.

If the stock trades at:

• $38, it may look undervalued
• $53, it may look fairly valued
• $70, it may look expensive on this formula

That is the basic calculator logic behind many "how to calculate graham number" and "graham formula calculator" searches. The math is easy. The hard part is choosing a sensible growth assumption.

Example of Graham Formula Valuation

Let us walk through a fuller example.

Assume Company A has:

• EPS = 5.00
• Expected growth rate = 3%
• Book value per share = 28
• Current stock price = $54

Graham Formula valuation

V = 5.00 x (8.5 + 2 x 3)
V = 5.00 x 14.5
V = 72.50

Based on the Graham Formula, intrinsic value is about $72.50.

Graham Number valuation

Graham Number = sqrt(22.5 x 5.00 x 28)
Graham Number = sqrt(3150)
Graham Number = 56.12

Based on the Graham Number, the conservative value threshold is about $56.12.

What does that mean?

Now you have two useful reference points:

• Graham Formula estimate = $72.50
• Graham Number estimate = $56.12
• Market price = $54

Interpretation:

• The stock is below the Graham Number, which suggests it may be conservatively priced.
• It is also well below the Graham Formula estimate, which suggests additional upside if the growth assumption is realistic.

This is how many investors use the two together:

• Graham Number for a stricter first screen
• Graham Formula for a broader earnings-based estimate

If you want a workflow rather than a single formula, pair this page with the Graham Screener so the valuation shortcut sits inside a fuller Graham-style process.

But neither result should be accepted blindly. Before using either in a real decision, you should check whether reported earnings are reliable. That is where Earnings Quality, Owner Earnings, and Valuation Methods become important.

When the Graham Formula Works

The Graham Formula works best in a fairly narrow set of situations.

It is most useful for:

• stable businesses with positive earnings,
• companies with modest and believable growth,
• businesses with understandable economics,
• investors who want a fast first-pass value estimate.

It tends to work better when:

• EPS is not heavily distorted by one-time items,
• growth assumptions are conservative,
• the company is not highly cyclical,
• the balance sheet is not unusually weak.

In other words, the formula is most useful when the business is boring in a good way. Stable earnings and modest growth fit Graham-style analysis much better than exciting stories or speculative turnarounds.

Limitations of the Graham Formula

The Graham Formula is useful, but it has several important limitations.

1. Outdated assumptions

The formula was developed in a very different market environment. Interest rates, accounting rules, business models, and valuation norms have changed over time.

That does not make the formula useless, but it does mean you should treat it as a rough heuristic rather than a timeless law.

2. Growth sensitivity

Small changes in g can produce large changes in value.

Example:

• EPS = 4
• g = 2 gives value of 4 x 12.5 = 50
• g = 6 gives value of 4 x 20.5 = 82

That is a huge difference created by a modest change in the growth assumption.

3. It depends on accounting earnings

The formula uses EPS, but accounting earnings are not always economic earnings.

If EPS is inflated by:

• aggressive revenue recognition,
• weak cash conversion,
• temporary margin spikes,
• unusual accounting gains,

then the valuation can be too high.

That is why Graham-style investors should connect valuation with earnings quality, not treat the formula as a stand-alone answer.

4. It ignores capital structure and cash flow detail

The formula does not directly account for:

• leverage,
• free cash flow,
• reinvestment needs,
• cyclicality,
• asset quality.

That means two companies with the same EPS can deserve very different values.

Graham Formula vs Modern Valuation Methods

The Graham Formula is still useful, but it is much simpler than modern valuation methods.

Compared with DCF

DCF is more flexible and more complete because it models:

• future cash flows,
• discount rates,
• reinvestment needs,
• terminal value.

But DCF is also easier to manipulate because many assumptions must be chosen. The Graham Formula is weaker, but simpler and harder to over-engineer.

Compared with multiples

Market multiples are useful because they compare a stock with peers. But multiples tell you what the market is paying, not necessarily what the business is intrinsically worth.

The Graham Formula gives you an internal estimate. Multiples give you an external market comparison. Good investors often use both.

How Investors Use the Graham Formula Today

Today, most investors use the Graham Formula as a screening tool, not as a final valuation model.

Common uses include:

• screening for potentially undervalued stocks,
• checking whether price looks rich relative to earnings,
• comparing a stock price with a conservative value estimate,
• creating a quick first-pass watchlist before deeper work.

A practical workflow looks like this:

1. Calculate the Graham Formula.
2. Calculate the Graham Number.
3. Compare both with the current stock price.
4. Check Earnings Quality.
5. Review Basic Earning Power for operating strength.
6. Cross-check with broader Valuation Methods and Valuation Metrics.

That is the right way to use the formula now: as a disciplined shortcut inside a larger valuation process.

Calculate Intrinsic Value Faster

The Graham Formula is best used as a quick estimate, not a substitute for judgment.

If you want to apply Benjamin Graham's methods more effectively:

• start with the Benjamin Graham Guide for the bigger philosophy,
• use Earnings Quality to test whether reported profits are real,
• use Basic Earning Power to isolate operating strength,
• and compare the result with broader Valuation Methods.

That combination is much stronger than any single formula used in isolation.