Graham number
By Jude Wallis
The Graham number is the square root of 22.5 times earnings per share times book value per share. It is a rough ceiling price for a defensively selected stock.
Keep reading
The 22.5 is two rules of thumb multiplied together: pay no more than 15 times earnings, and no more than 1.5 times book value. Rather than applying both tests separately, the number combines them so a company can be strong on one measure and weaker on the other while the product stays inside the limit.
Both inputs must be positive for the square root to mean anything. A loss-making company or one with negative book value has no Graham number, and that absence is information rather than a gap to fill with an adjusted figure.
Businesses whose worth sits in brands, software or research carry little book value, so the ceiling reads as far too low for them. The Graham number calculator does the arithmetic, book value is the balance sheet side, and how book value per share works explains the per-share conversion.