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Sri Lanka Equity Forum » Stock Market Talk » Expert Chamber » The Graham Number

The Graham Number

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1The Graham Number Empty The Graham Number on Fri Sep 07, 2012 7:17 pm

sriranga

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 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 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/

2The Graham Number Empty Re: The Graham Number on Fri Sep 07, 2012 7:52 pm

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Interesting ! So Graham Number for say ALLI is 1600 !

3The Graham Number Empty Re: The Graham Number on Fri Sep 07, 2012 7:53 pm

Antonym

Antonym
Vice President - Equity Analytics
Vice President - Equity Analytics
Based on the latest Annual Reports, the Graham Number for some of my favorite shares is as follows...
RENU: Rs 657
CFLB: Rs 71
CABO: Rs 118
CTLD: Rs 71
JINS: Rs 18

Quite frankly, I prefer the Antonym Number...

Stock selection and investing should never be restricted to quantitative methods. However, I have found it useful to use a formula to assess whether a share is worth investing in or not; it is a method of elimination, not a method of selection.

My simple formula assigns weights to financial performance parameters that matter to me:
(5 x EPS) + (0.6 x BVPS) + (10 x DPS)

Let's take some assumed figures for a hypothetical company...
EPS = Earnings per Share = Rs 7.40
BVPS = Book Value per share = Rs 55.55
DPS = Dividend per Share = Rs 2.50
Then, according to my formula, the maximum that I would pay for that share is:
(5 x 7.40) + (0.6 x 55.55) + (10 x 2.50) = Rs 95.33.

Try it out, change the weights if you wish, and see whether it works for your favorite share!

http://forum.srilankaequity.com/t19816-some-thoughts-on-cse-market-situation-at-present



Last edited by Antonym on Sat Sep 08, 2012 7:42 am; edited 1 time in total

4The Graham Number Empty Re: The Graham Number on Fri Sep 07, 2012 8:00 pm

Kithsiri

Kithsiri
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
How about GLAS / RICH & Union Bank ?
(Sorry Guys, Mathematics was my Achilles heel). Embarassed

5The Graham Number Empty Re: The Graham Number on Fri Sep 07, 2012 8:21 pm

Sana


Senior Equity Analytic
Senior Equity Analytic
ohh based on the graham equation MAL shoes a fair value of 7.55...currently its at a lower price! haahaa.. im stil collectin as much as i possibly cud..im sure this share will make me rich one day! Very Happy

6The Graham Number Empty Re: The Graham Number on Sat Sep 08, 2012 12:22 am

kalum


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Sana, I wish you right. me too Razz

7The Graham Number Empty Re: The Graham Number on Sat Sep 08, 2012 7:27 am

sureshot


Vice President - Equity Analytics
Vice President - Equity Analytics
maths ...............me too

any Pythagoras who can help me to calculate for TWOD ?
t h a n k s ... Laughing

8The Graham Number Empty Re: The Graham Number on Sat Sep 08, 2012 7:43 am

kmchandra1


Equity Analytic
Equity Analytic
hi experts....me too also maths..would be great for REG, Sembx Smile

9The Graham Number Empty Re: The Graham Number on Sat Sep 08, 2012 9:13 am

malanp


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

share values depend on the sector, ie industry, so shares in some sectors never rise to a true value.

In CSE Plantation,Motor sector shares did not meet Graham criterion, and always undervalued.

10The Graham Number Empty Re: The Graham Number on Sat Sep 08, 2012 12:48 pm

K.Haputantri

K.Haputantri
Co-Admin
Thanks Shri & Antonym for your contributions.

My suggestions to improve usefulness of the two numbers;

Greham Number:- Use estimated future EPS instead of historical EPS.
Antonym Number:- Use Sector wise weitages insted of a fixed numbers.

Warning: Manipulated shares need to be avoided.

11The Graham Number Empty Re: The Graham Number on Sat Sep 08, 2012 1:48 pm

sriranga

sriranga
Co-Admin
Thanks for the comments, appreciate Antonym Number.
Following link may help to gather more infos regarding fair value.
http://www.gurufocus.com/news/171624/methods-for-arriving-at-the-fair-value-of-companies

http://sharemarket-srilanka.blogspot.co.uk/

12The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 12:41 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Some would enjoy doing calculations Smile for week end

13The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 12:46 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert

14The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:17 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Asper Graham Number For ASIY

Would be 5.16 Smile

Sqrt 22.5*.44*2.69

15The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:20 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
CTBL =4.40 Smile

How is the power of Shark

16The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:23 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
LIOC stands @80Rs

17The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:24 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
HHL = 55Rs

18The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:30 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
DIAL =8.45

19The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:33 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
PAP 3.36 Very Happy 

20The Graham Number Empty Re: The Graham Number on Sat Jul 12, 2014 1:38 am

SHARK aka TAH

SHARK aka TAH
Expert
Expert
Incidentally FLC Hydropower = graham no =4.73 (based on company) not consolidated Smile

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