Graham Number
Candlefocus EditorThe Graham Number is used to determine the maximum price an investor should pay for a stock. It is calculated using a company's earnings per share and book value per share. The calculation arrives at a normalized number by taking the product of the two per share numbers and multiplying by 22.5. This represents an ideal Price to Earnings (P/E) ratio of 15x and a Price to Book (P/B) Value of 1.5x.
The Graham Number helps investors by providing an objective calculation for determining the maximum price a stock should be purchased for. By using the Graham Number, the investor can make a value-oriented decision on when to buy or sell a stock. This is very beneficial in a market where stock prices can range drastically and quickly.
The Graham Number has become widely accepted in the investing community and is used by many investors when making decisions on stock purchases. While the metric has its limits, such as not taking into account of other factors such as competition, regulation, and inflation, it can provide a valuable guideline for stock investors looking to make value oriented choices.
In the end, it is important to use the Graham Number in tandem with other factors such as fundamental and technical analysis when deciding when to buy or sell a stock. While the Graham Number can provide an important metric for stock investors it is important to remember that no single number can provide the complete picture.