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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » The Graham Number

The Graham Number

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sriranga


Co-Admin
The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:

The Graham Number - Page 3 D5b77410

Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:

The Graham Number - Page 3 Ben10


This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.

Unlike valuation methods such as DCF or Discounted Earnings, the Graham number does not take growth into the valuation. Unlike the valuation methods based on book value alone, it takes into account the earnings power. Therefore, the Graham Number is a combination of asset valuation and earnings power valuation.

In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.

Graham value is applicable only to the companies that have positive earnings and positive tangible book value.

The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.

The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.

When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:

1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.

2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.

3. Graham Numbers underestimates companies that are light with book.

Source: Edited articles from Wikipedia and http://www.forbes.com

http://sharemarket-srilanka.blogspot.co.uk/
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Post Fri Oct 10, 2014 9:41 am by jonny

@sriranga wrote:The Graham number or Benjamin Graham number is a figure used in securities investing that measures a stock's so-called fair value. Named after Benjamin Graham, the founder of value investing, the Graham Number can be calculated as follows:

The Graham Number - Page 3 D5b77410

Alternative calculation
Earnings per share is calculated by dividing net income by shares outstanding. Book value is another way of saying shareholders' equity. Therefore, book value per share is calculated by dividing equity by shares outstanding. Consequently, the formula for the Graham number can also be written as follows:

The Graham Number - Page 3 Ben10


This is one of the ways to estimate the intrinsic value of business based on their book value and their earnings power.

Unlike valuation methods such as DCF or Discounted Earnings, the Graham number does not take growth into the valuation. Unlike the valuation methods based on book value alone, it takes into account the earnings power. Therefore, the Graham Number is a combination of asset valuation and earnings power valuation.

In general, the Graham number is a very conservative way of valuing a stock. It cannot be applied to companies with negative book values.

Graham value is applicable only to the companies that have positive earnings and positive tangible book value.

The final number is, theoretically, the maximum price that a defensive investor should pay for the given stock.Put another way, a stock priced below the Graham Number would be considered a good value, if it also meet a number of other criteria.

The complete Graham selection procedure is much more elaborate. No decision should be made based on this number alone.

When applying any of those valuation methods, you need to be aware of their limitations. Please keep these in mind:

1. Graham Number does not take growth into account. Therefore it underestimates the values of the companies that have good earnings growth. We feel that if the earnings per share grows more than 10% a year, Graham Number underestimates the value.

2. Graham Number punishes the companies that have temporarily low earnings. Therefore, an average of earnings makes more sense in the calculation of Graham Number.

3. Graham Numbers underestimates companies that are light with book.

Source: Edited articles from Wikipedia and http://www.forbes.com

Dear Sri,

Heard after a long interval.Where were you...Welcome back..!

In above equation need to know about the above 22.5 factor.How do you arrive this value..??

Thanks/Jonny +

Post Fri Oct 10, 2014 12:31 pm by GroundedKestrel

What about for #VPEL?

Post Fri Oct 10, 2014 5:22 pm by SHARK aka TAH

Hey Jonny,

Its 1.5 PBV and 15 P/E Very Happy

This is the Max one should consider as per Benjamin Graham

Post Sun Nov 22, 2020 3:04 pm by Quibit

The Ben Graham Way to find intrinsic value of a stock

සෑම ආයෝජකයෙක්ම තොගයක් මිල අධිකද, අඩු මිලක්ද, සාධාරණ මිලක්ද යන ප්‍රශ්නයට මුහුණ දෙයි. සිල්ලර ආයෝජකයින්ට මෙය තක්සේරු කිරීම සඳහා විවිධ තක්සේරු ආකෘති භාවිතා කරමින් දිගු, දැඩි ගණිතමය ගණනය කිරීම් සිදු කිරීම සාමාන්‍යයෙන් කළ නොහැකිය. ඉතින්, ඔහු කුමක් කළ යුතුද? වර්ධන කොටස්වල තක්සේරු කිරීම් සොයා ගැනීම සඳහා බෙන්ජමින් ග්‍රැහැම්ගේ සරල සූත්‍රය ගලවා ගනී.

Intrinsic value = [EPS × (8.5 + 2g) × 4.4]/Y

The Graham Number - Page 3 D85c4e10

avatar

Post Sun Nov 22, 2020 3:12 pm by Nuwancha

https://www.facebook.com/KnwHunting/

Manipulater likes this post

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Post Sun Nov 22, 2020 5:33 pm by samaritan

There is another model to value shares known as 'Dividend discount model'. 

I have given the link below for illustration.

[url=https://www.moneycrashers.com/dividend-discount-valuation-model/#:~:text=Example of the Dividend Discount,then 3% each year thereafter.]https://www.moneycrashers.com/dividend-discount-valuation-model/#:~:text=Example%20of%20the%20Dividend%20Discount,then%203%25%20each%20year%20thereafter.[/url]

CONCLUSION:

In my opinion 'The Graham Number' & 'Dividend discount model' deserve to be in the garbage bin!

avatar

Post Sun Nov 22, 2020 5:34 pm by Nandun

@Quibit wrote:The Ben Graham Way to find intrinsic value of a stock

සෑම ආයෝජකයෙක්ම තොගයක් මිල අධිකද, අඩු මිලක්ද, සාධාරණ මිලක්ද යන ප්‍රශ්නයට මුහුණ දෙයි. සිල්ලර ආයෝජකයින්ට මෙය තක්සේරු කිරීම සඳහා විවිධ තක්සේරු ආකෘති භාවිතා කරමින් දිගු, දැඩි ගණිතමය ගණනය කිරීම් සිදු කිරීම සාමාන්‍යයෙන් කළ නොහැකිය. ඉතින්, ඔහු කුමක් කළ යුතුද? වර්ධන කොටස්වල තක්සේරු කිරීම් සොයා ගැනීම සඳහා බෙන්ජමින් ග්‍රැහැම්ගේ සරල සූත්‍රය ගලවා ගනී.

Intrinsic value = [EPS × (8.5 + 2g) × 4.4]/Y

The Graham Number - Page 3 D85c4e10

How find Y?

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