The Graham Number: PER Times PBR Against 22.5
The value-investing classics contain several numeric gates a stock should pass before purchase. The easiest to follow is the Graham number. The name sounds difficult, but the actual check is a single multiplication: estimate a price ceiling from earnings and book value, then see whether today's price is above or below it.
One multiplication is enough
The original formula takes the square root of 22.5 × earnings per share × book value per share. The 22.5 comes from Graham's two ceilings multiplied together: PER 15 and PBR 1.5 (15 × 1.5 = 22.5). It bounds the price by earnings and assets at once.
If the square root feels clumsy, the same content has an easier form: multiply the stock's PER by its PBR and check whether the result is 22.5 or below. A stock at PER 9 and PBR 0.8 gives 7.2, comfortably inside. PER 30 with PBR 4 gives 120, more than five times the ceiling.
Both inputs are on each stock page's public data table, so the check takes seconds without a calculator.
Is everything above 22.5 bad
No. The rule is a safety line against paying up on both yardsticks at once, not a divider between good and bad companies. Fast growers carry expectations in the price, run high PERs, and mostly fail this gate. For those, a growth-aware yardstick like PEG fits better.
Passing is not the end either. A stock cheap on both PER and PBR may carry a story of deteriorating earnings. Use the gate as a first filter, then confirm the story with money flow and recent results.
A practical sequence
Collect low-PER names from the value screener. Check PBR on each stock page and multiply. Keep only those at 22.5 or below, and the Graham gate is done.
For the survivors, read the neglect index for range position and money flow for returning attention. Passing the numeric gate while recovery signals overlap is the practical use of this rule.
Frequently asked questions
- Bank stocks mostly pass. Are they all undervalued?
- Banking tends to run structurally low PBRs and passes easily. Compare within the sector and read dividends and earnings trends together.
- What if PER or PBR is missing?
- Loss-making companies have no PER, so the Graham number cannot be computed. Skip this gate and use other yardsticks such as assets, cash flow, or the industry cycle.
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