Benjamin Graham Formula and Graham Number for Stock Valuation

Published: September 16, 2015 at 6:00 pm

Last Updated on December 3, 2020

In the 7th version of the automated stock analyzer, two more valuation metrics have been added: The Graham Formula and the Graham Number. Bugs and suggestions made by users have been corrected/incorporated in this edition.

The automated stock analyzer

  • pulls annual (standalone/consolidated) and quarterly financials from Value Research online
  • pulls financials from morningstar and analyzes them, adjusted
  • pulls adjusted stock price history from money control, and
  • calculates intrinsic value six different ways!

Valuation models available:

1) Price Multiple Model

2) Sustainable Growth Rate

3) Book Value Growth Rate (Buffett’s approach to valuation)

4) Discounted Cash Flow (DCF) Thanks to Debasish Hazra  and Ninand Diveakr for pointing out a bug. This is now corrected

5) Reverse DCF Valuation

6) Graham formula  and Graham number

All necessary links for learning each valuation model is provided in the Excel sheet itself. Following the flow of information in the sheet, a new investor should be able to understand how the valuation is done.

Graham Formula:

This uses the EPS, EPS growth rate, the risk-free return and long-term corporate bond yields to arrive at the intrinsic value of a stock.

Graham number:

This is thumb rule valuation that uses 15 times earnings per share and 1.5 times book value.


Note
: I am not a stock investor. I only have an academic interest in stocks and do not have a feel for the limitations of valuation metrics and ‘when’ to use ‘what’.Both these metrics are described in his book, The Intelligent Investor.

Caveats to note before using the sheet pointed out byIndranealBalasubramaium
(1) Financial stocks like banks, housing finance companies and non-banking financial companies have balance sheet structures that are likely to be different from regular companies. Make sure to read the annual report and especially notes to financial statements.
(2) Take the time out to understand valuation models and how they are derived, what the implications are. Precision can give a false sense of accuracy, especially when dealing with an uncertain future. Better to be approximately right than exactly wrong.

If you like the sheet, do consider making a monetary contribution by using the link below.

A slew of updates to this analyzer is planned. So if you got here via a Google search, do subscribe to the blog.  Do consider sharing this link with stock investing community forum so that a better analysis tool may evolve from feedback.

Download version 14th of the freefincal stock analyzer June 16th, 2019 <== latest!

For U.S. stocks use this free sheet: U.S. STOCK ANALYSIS SPREADSHEET

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements write to pattu [at] freefincal [dot] com
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