How to use the graham number and peg calculator
- Enter the earnings per share and the book value per share. Both must be above zero.
- Add a share price to see how it compares with the Graham number, along with the P/E and P/B ratios.
- Add an expected yearly growth rate to get the PEG ratio. It needs a price and a growth rate above zero.
- Open the advanced options to change the multiplier of 22.5, then read the two sensitivity tables to see how the number moves if earnings or book value change.
Formula
Graham number = square root of (multiplier x earnings per share x book value per share)
P/E ratio = price / earnings per share
P/B ratio = price / book value per share
PEG ratio = P/E ratio / expected growth in percent
The multiplier 22.5 equals 15 times earnings multiplied by 1.5 times book value. Setting the price equal to the Graham number makes P/E times P/B equal to 22.5.
Earnings of $5 and book value of $20
With earnings per share of $5 and book value per share of $20, the Graham number is the square root of 22.5 x 5 x 20, which is the square root of 2,250, or $47.43. A share price of $40 is 84.3 percent of that number.
The same price gives a P/E of 40 / 5 = 8.00 and a P/B of 40 / 20 = 2.00, so P/E times P/B is 16.00, below the 22.5 limit. With expected growth of 12 percent a year, the PEG ratio is 8.00 / 12 = 0.67. If earnings were 20 percent lower at $4, the Graham number would drop to $42.43 and the same $40 price would be 94.3 percent of it.
Where the formula comes from
Benjamin Graham suggested that an investor in sound companies might accept a price of up to about 15 times earnings and up to about 1.5 times book value. Instead of requiring both limits separately, he allowed the product of the two ratios to be as high as 22.5. Solving price squared = 22.5 x earnings x book value for the price gives the Graham number.
The page treats the multiplier as an editable assumption. Changing it to 15 or 30 shows how sensitive the result is to the rule, and nothing here says that 22.5 is right for any company or market today.
The PEG ratio
The PEG ratio divides the P/E by the expected growth rate in percent, so a company with a P/E of 20 and growth of 20 percent has a PEG of 1. The idea is to adjust the price you pay for earnings for how fast the earnings are expected to grow. It depends entirely on the growth estimate, which is a forecast, so try several values. See the P/E Ratio Calculator for the first half of the ratio.
What it leaves out
Both numbers are screens built from two accounting figures. They ignore debt, cash, the quality and stability of earnings, the industry and the business itself. Negative earnings or negative book value make the formula meaningless, so the page asks for positive values. To see how much room a price leaves for being wrong, try the Margin of Safety Calculator.
Assumptions and limits
- Earnings per share and book value per share are positive figures you supply. The page does not look anything up.
- The multiplier is 22.5 unless you change it in the advanced options.
- The PEG ratio uses the growth rate you type, in percent, and needs a price. A growth rate of zero or less gives no PEG value.
- The sensitivity tables change one input at a time by 10 and 20 percent and hold the other fixed.
- The results are arithmetic on your figures, not a valuation or advice, and nothing typed here leaves your browser.
Frequently asked questions
Does a share price below the Graham number mean the stock is cheap?
No. It only means the price meets one screening rule for the figures you typed. The figures may be out of date or unrepresentative, and the rule ignores debt and the health of the business.
Which earnings and book value should I use?
Use figures you can defend, such as trailing twelve month earnings per share or an average over several years, and the latest reported book value per share. Different choices give different numbers, which is why the sensitivity tables are there.
Why is the PEG ratio missing?
The PEG ratio needs a share price and an expected growth rate above zero. If either is blank, or the growth rate is zero or negative, the page shows a note instead of a number.
Can the multiplier be changed?
Yes, in the advanced options. The default of 22.5 comes from combining 15 times earnings with 1.5 times book value. Other values describe other limits, and none of them is a law.