The Graham Number

Ever heard of the Graham Number? This was a formula developed by Ben Graham, the father of securities analysis, to determine the fair value for a stock.

The Graham Number is:

The square root of [earnings-per-share * book-value-per-share * 22.5]

(Take note that earnings-per-share divided by book-value-per-share is our good friend return on equity.)

Let’s run an example: Nicholas Financial ($NICK) earned $1.63 per share in the four quarters ending March 31, 2013. The book value per share is $10.46.

So…if we multiply $1.63 * $10.46 * $22.5, that gives us $383.62.

The square root of $383.62 gives us $19.59. So by the Graham Number, NICK is going for a hefty 25% discount to its fair value.

Posted by on June 5th, 2013 at 11:25 am


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