Calculator
Graham Formula (Simple)
Graham Formula (Revised)
Definition – What is the Graham Formula?
The Graham Formula was a simplified version of common financial formulas in the 1970s. It was proposed by Benjamin Graham as a way for value investors to identify the underlying value of a company’s stock.
Formula – How to calculate the Graham Formula
Graham Formula (Simple) = Earnings per Share x (8.5 + (2 x reasonably expected 7-10 year growth rate))
Graham Formula (Revised) = (Earnings per Share x (8.5 + (2 x reasonably expected 7-10 year growth rate)) x 4.4) / Current Yield on AAA Bonds
Example
Simple – A stock has a share price of $2.50 and an expected growth rate of 5.59%.
Graham Formula (Simple) = 2.50 x (8.5 + (2 x 5.59)) = 2.50 x (8.5 + 11.18) = 2.50 x 19.68 = 49.2
Revised – A stock has a share price of $2.50, an expected growth rate of 5.59%, and AAA bond yields are 1.72%.
Graham Formula (Revised) = (2.50 x (8.5 + (2 x 5.59)) x 4.4) / 1.72 = (2.50 x (8.5 + 11.18) x 4.4) / 1.72 = (2.50 x 19.68 x 4.4) / 1.72 = 216.48 / 1.72 = 125.86
Sources and more resources
- Freedom Thirty Five Blog – How to value stocks using the Graham Formula – An example of calculating a stock’s value with the Graham Formula.
- Wikipedia – Benjamin Graham Formula – Wikipedia’s entry on the Graham Formula.