Graham Number Calculator
Graham Number Calculator
Graham Number:
What is the Graham Number Calculator?
The Graham Number Calculator is a tool designed to assist investors in evaluating stock valuations. Named after the famous investor and economist Benjamin Graham, this calculator combines two fundamental metrics from a company's financials: the Earnings Per Share (EPS) and the Book Value Per Share (BVPS).
Application and Benefits
This calculator is particularly useful for value investors who adhere to conservative investing principles. By inputting the EPS and BVPS, the calculator provides a simplified yet reliable measure of a stock's intrinsic value. Investors can then compare this intrinsic value with the stock's current market price to determine if the stock is overvalued, fairly valued, or undervalued.
This not only helps in making informed investment decisions but also minimizes risk by identifying stocks that are fundamentally sound yet possibly underpriced by the market.
How the Answer is Derived
The calculation involves multiplying the EPS by the BVPS and then multiplying the result by a constant (22.5) that Graham suggested, based on his screening criteria. Finally, the square root of this product gives the Graham Number. This number serves as a threshold price for investors; buying below this price is generally considered a good value investment.
Interesting Information
The Graham Number Calculator aids in streamlining the stock evaluation process, saving investors time and effort. It is especially beneficial for newcomers to stock investing, providing a straightforward and effective method to assess stock worth. Given its simplicity and effectiveness, the Graham Number remains a staple in the toolkit of seasoned and novice investors alike.
FAQ
What is the Graham Number?
The Graham Number is a value that helps investors determine the fair price of a stock based on its earnings per share (EPS) and book value per share (BVPS). It acts as a threshold, indicating whether a stock might be undervalued or overvalued.
How is the Graham Number calculated?
The formula for calculating the Graham Number is: Graham Number = √(22.5 * EPS * BVPS). This formula multiplies the EPS and BVPS and then multiplies the product by 22.5. Finally, the square root of this result gives the Graham Number.
Why use the constant 22.5 in the calculation?
The constant 22.5 reflects Graham’s investment criteria for satisfactory levels of earnings and book value. It represents his conservative estimate to balance the combination of a company's profitability and asset value.
What data do I need to use this calculator?
You need two key pieces of information: the Earnings Per Share (EPS) and the Book Value Per Share (BVPS) of the stock you are evaluating. These metrics are typically found in the company's financial statements.
Is the Graham Number a definitive measure of value?
While the Graham Number provides a useful estimate of a stock's intrinsic value, it is not definitive. It should be used in conjunction with other analyses and metrics to make a well-rounded investment decision.
Can the Graham Number change over time?
Yes, the Graham Number can change over time as a company's earnings and book value fluctuate. Regular updates to the stock's EPS and BVPS will ensure the accuracy of the Graham Number.
Is this calculator useful for all types of stocks?
The Graham Number Calculator is most applicable to companies with stable earnings and book values. It may be less effective for evaluating high-growth stocks or companies in volatile industries.
How can new investors benefit from this calculator?
New investors can benefit by using the calculator to quickly assess whether a stock may be undervalued. It simplifies the process of valuation, making it easier to spot potential investment opportunities without needing extensive financial expertise.
What should I do if the market price is below the Graham Number?
If the market price is below the Graham Number, the stock may be undervalued. This could present a buying opportunity, but it's important to conduct further research and consider other factors before making an investment decision.