TL;DR: The Benjamin Graham formula is V equals EPS multiplied by (8.5 plus 2g), where EPS is earnings per share and g is the expected annual earnings growth rate over roughly the next seven to ten years, expressed as a whole number. For a company earning $2.00 per share with expected growth of 5 percent, the formula gives $2.00 times 18.5, which equals $37.00. It is a quick shorthand from 1960s market conditions, not a substitute for full valuation work.
Key Takeaways
- The formula is V equals EPS times (8.5 plus 2g), with g entered as a whole number, so 5 percent growth is entered as 5.
- The 8.5 represents the price to earnings ratio Graham assigned to a company with no growth.
- Each point of expected growth adds 2 to the multiplier, which makes the output very sensitive to the growth guess.
- An interest-rate-adjusted version multiplies the result by 4.4 divided by the current yield on high grade corporate bonds.
- The result is a rough reference to compare with other methods such as the Graham Number, not a stand alone answer.
Where does the Benjamin Graham formula come from?
Graham presented the formula in The Intelligent Investor as a simplified way to approximate the valuations that fuller analysis produced for growth stocks. In his era, a company with no expected growth was, in his judgment, worth about 8.5 times its earnings. Expected growth then added to that multiple: twice the growth rate, so a company expected to grow at 7.5 percent a year would merit a multiple of 8.5 plus 15, which is 23.5 times earnings. The formula compressed a table of multiples into one line of arithmetic.
Context is essential. Graham wrote when interest rates and typical market multiples differed from many later periods, and he presented the formula as an approximation to the more elaborate growth-stock calculations of his day, warning that growth projections were unreliable and that the output did not establish a stock's true value. His defensive stock-selection criteria, quality conditions requiring positive earnings and a record behind them, are a separate framework. Read as he presented it, as a historical illustration, the formula still shows roughly what growth expectations a price implies. What the formula does not supply is a cushion for being wrong, which is the separate question of what makes a good margin of safety.
How do you work the formula step by step?
Take a hypothetical company with earnings per share of $2.00 and an expected earnings growth rate of 5 percent a year. First compute the growth term: 2 times 5 equals 10. Add the base: 8.5 plus 10 equals 18.5. Multiply by earnings: $2.00 times 18.5 equals $37.00. That is the formula's value estimate. Now test the sensitivity. At 0 percent growth, the multiplier is 8.5 and the value is $17.00. At 10 percent growth, the multiplier is 28.5 and the value is $57.00. The same earnings support answers from $17 to $57 purely on the growth input.
That spread is the lesson. The formula moves the hard question rather than answering it: what growth rate is realistic for seven to ten years? Do not assume double digit earnings growth will persist for seven to ten years; using a company's best recent year as the permanent rate is the classic misuse. A defensible workflow uses a growth rate below the company's recent record, cross-checks it against the industry's economics, and treats the output as the optimistic end of a range unless the inputs were deliberately conservative.
What is the revised Graham formula?
A revised version adjusts the formula for interest rates by multiplying the result by 4.4 divided by Y, where 4.4 represents the average AAA corporate bond yield in 1964 and Y is the comparable current yield, both expressed as percentages. When current yields equal 4.4, the adjustment factor is 1 and nothing changes. When yields are higher, the factor falls below 1 and the formula's value falls, reflecting that higher rates make future earnings worth less today and make bonds more competitive.
Work the adjustment on the earlier example. The unadjusted value was $37.00. If Y were 5.5, the factor would be 4.4 divided by 5.5, which equals 0.8, and the adjusted value would be $37.00 times 0.8, which equals $29.60. You do not need to adopt the revision to learn from it: any valuation shortcut built in one rate environment will drift in another, and the honest response is to check what your method assumes about rates, explicitly or silently. Fuller models handle this through the discount rate, as shown in our guide to calculating intrinsic value.
What are the formula's main limitations?
Four stand out. First, it uses a single earnings figure, so a company at a cyclical earnings peak looks artificially cheap and one in a temporary trough looks artificially expensive. Second, it ignores the balance sheet entirely: two companies with identical earnings and growth but very different debt get identical values. Third, zero or negative earnings do not provide a useful valuation reference under this shortcut. A growth input producing a nonpositive multiplier is also outside its useful application. The revised version requires a strictly positive, comparable bond yield; a zero yield causes division by zero, and a negative yield makes the adjustment unsuitable. Fourth, its constants reflect historical market conditions, so the output should not be treated as a timeless valuation rule.
None of this makes the formula useless. It makes it a screening and sanity check tool: quick to compute, easy to invert to ask what growth a price implies, and valuable mainly when its answer broadly agrees with other approaches. When the formula, a cash flow model, and a conservative asset based check point in different directions, the disagreement itself is the finding, and the correct next step is more research, not averaging the three and moving on.
FAQ
Is the Graham formula the same as the Graham Number? No. They are two different tools from Graham. The formula values a stock from earnings and expected growth. The Graham Number sets a price ceiling from earnings and book value, using the square root of 22.5 times EPS times book value per share. This site explains the Number separately.
What growth rate should I enter? A conservative estimate of average annual earnings growth over roughly the next seven to ten years, entered as a whole number. The estimate should be one you can defend as modest and sustainable; Graham warned that growth projections were unreliable. If you cannot defend the rate from the company's record and industry, the formula cannot rescue the analysis.
Does the formula work for companies that pay no dividend? Mechanically yes, since dividends do not enter it. Graham's broader approach favored companies with established records, and many of his examples paid dividends, but the arithmetic itself needs only positive earnings and a growth estimate.
Why do websites show different Graham formula values for the same stock? Because they use different earnings figures, different growth estimates, and sometimes the revised interest rate adjustment and sometimes not. Two outputs can both be arithmetically correct while resting on different inputs. Always check which inputs a site used.
Sources
- U.S. Securities and Exchange Commission, Beginners' Guide to Financial Statements (https://www.sec.gov/about/reports-publications/beginners-guide-financial-statements).
- Benjamin Graham, The Intelligent Investor, chapter 11, for the growth-stock formula and its warnings. Benjamin Graham, "The Decade 1965-1974: Its Significance for Financial Analysts", in The Renaissance of Value, Financial Analysts Research Foundation, 1975, for the revised formula.
Educational content, not financial advice. Any worked example uses hypothetical, illustrative figures chosen for round numbers. It is not a projection of any security's returns and not a recommendation to buy or sell any security.
