The Graham growth formula
Benjamin Graham, one of the best-known writers on fundamental analysis, presented a simplified formula to illustrate the link between EPS, expected growth and valuation, now known as the Graham growth formula: value = EPS × (8.5 + 2 × expected growth rate). He warned against relying on growth forecasts and against treating the result as a certain value or a buying rule. We explain it here because it is a well-known formula tied to his name, and we show its limits. The 8.5 was, for him, a fair P/E for a company with no growth, and 2 × growth raises that multiple as growth increases. Growth is written as a number, so 5% is written 5.
A common revised form adds a 4.4 ÷ Y factor, where Y is the yield on high-grade (AAA) corporate bonds. The 4.4 was the yield at the time and place the formula was written, and sources differ on when this revision was added.
A worked example
An invented company has EPS of EGP 2.00, with profits expected to grow 5% a year.
In the original form: 2 × (8.5 + 10) = 37. If the current yield is 4.4%, as when the formula was written, nothing changes. But assume a 22% yield and the factor becomes 4.4 ÷ 22 = 0.2, giving 37 × 0.2 = only 7.40.
The Graham Number
The Graham Number is different from the growth formula: Graham Number = the square root of (22.5 × EPS × book value per share). The 22.5 comes from two limits Graham used: a P/E no higher than 15 and a price-to-book no higher than 1.5, and 15 × 1.5 = 22.5. It has no growth and no bond yield, and it only works when both EPS and book value are positive.
Why be careful?
Fixed numbers like 8.5 and 4.4, and even the 22.5 in the Graham Number, were set for another market in another era, with different yields and inflation. Where yields are high, the revised form gives very small numbers, while the original form ignores yields entirely. Neither has been adjusted to Egyptian market conditions.
If you use it, use it to compare companies under the same assumptions, not to produce one number and believe it.
Get the EPS
The formula starts from EPS. Open any stock page, take its EPS, and try the formula with several growth rates.
Check yourself
1. EPS EGP 3, expected growth 4%. What does the original form give?
2. Why does the revised form give a very small number when yields are high?
3. EPS EGP 1, book value per share EGP 10. What is the Graham Number?
Summary
- Graham growth formula: EPS × (8.5 + 2 × growth).
- The revised form multiplies by 4.4 and divides by the current bond yield.
- Graham Number = √(22.5 × EPS × book value per share), the one FoudaLens uses. Both are comparison screens, not valuations.