1. What is Graham Number Calculator?
Definition: This calculator computes the Graham Number, the maximum price a defensive investor should pay for a stock based on EPS and BVPS.
Purpose: Helps value investors identify undervalued stocks for long-term returns.
2. How Does the Calculator Work?
The calculator uses the formula:
Graham Number Formula:
\( \text{Graham Number} = \sqrt{15 \times \text{EPS} \times \text{BVPS} \times 1.5} \)
Where:
- \( \text{EPS} \): Earnings Per Share (dollars/share)
- \( \text{BVPS} \): Book Value Per Share (dollars/share)
Steps:
- Enter EPS and BVPS.
- Apply the Graham formula with P/E = 15 and P/B = 1.5.
- Display the result with 2 decimal places.
3. Importance of Graham Number
Calculating Graham Number is crucial for:
- Valuation: Identifies stocks trading below their intrinsic value.
- Risk Management: Provides a safety margin for defensive investing.
- Investment Strategy: Guides long-term value investing per Benjamin Graham’s philosophy.
4. Using the Calculator
Example 1: EPS = $5.00, BVPS = $20.00:
- EPS: $5.00
- BVPS: $20.00
- Graham Number: \( \sqrt{15 \times 5.00 \times 20.00 \times 1.5} = \sqrt{2,250} \approx 47.43 \) dollars/share
- Result: \( 47.43 \) dollars/share
Example 2: EPS = $2.50, BVPS = $15.00 (TD Synnex case):
- EPS: $2.50
- BVPS: $15.00
- Graham Number: \( \sqrt{15 \times 2.50 \times 15.00 \times 1.5} = \sqrt{843.75} \approx 29.04 \) dollars/share
- Result: \( 29.04 \) dollars/share (Note: Actual case adjusted for real data)
Example 3: EPS = $10.00, BVPS = $30.00:
- EPS: $10.00
- BVPS: $30.00
- Graham Number: \( \sqrt{15 \times 10.00 \times 30.00 \times 1.5} = \sqrt{6,750} \approx 82.15 \) dollars/share
- Result: \( 82.15 \) dollars/share
5. Frequently Asked Questions (FAQ)
Q: What is a good Graham Number?
A: A stock price below the Graham Number suggests undervaluation; compare with current market price.
Q: Why use 15 and 1.5?
A: These are Graham’s recommended maximum P/E and P/B ratios for safe investing.
Q: Where to find EPS and BVPS?
A: Check the company’s income statement and balance sheet or financial websites.
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