The Graham Number was considered to be the maximum price an investor should pay for a stock, according to the formula developed by Benjamin Graham.
It is calculated as follows: Graham Number = Square Root of (22.5) x (Earnings per Share) x (Book Value per Share).
This equation is predicated on Graham’s belief that the price-to-earnings (P/EPS) ratio should be no more than 15, and the price-to-book value (P/BVPS) ratio should be no more than 1.5. Therefore we only include companies that meet both of these criteria. As a result, the product of the two should not be more than 22.5. In other words, (P/EPS of 15) x (P/BVPS of 1.5) = 22.5.
Source: Seeking Alpha
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Posted by D4L | Wednesday, April 27, 2011 | ArticleLinks | 0 comments »________________________________________________________________
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