Graham’s Formula is not, however, a magic wand to screen for value stocks. The 4.4 references Graham’s desired rate of return. Where Y is the yield on 20-year corporate AAA rated bonds. Intrinsic Value = EPS x (8.5 + 2g) x 4.4 / Y This formula was developed at a time of low inflation, with growth being real and tangible and a AAA corporate bond interest of 4.4%. Graham later revised this formula to However, if this number is less than 1, the stock is to be avoided. If this number is greater than 1, the stock is a good buy.
The 8.5 multiplier is what Graham determined to be the fair PE ratio for a company with no growth (with an earnings yield of 100/8.5% = 11.76%).ĭividing the intrinsic value by the current stock price gives a number that is often used to screen stocks. The Intrinsic Value is the stock price, EPS is the earnings per share for the last year, and g is the projected growth rate over the next seven to ten years.
Discover Graham’s formula, a simple method for predicting the fair values of shares, and download a spreadsheet.īenjamin Graham presented a simple formula to value stock in his 1962 book “The Intelligent Investor”:
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