What it is
Benjamin Graham, in The Intelligent Investor, suggested a defensive investor should not pay more than 15 times earnings or 1.5 times book value, and that the product of the two should not exceed 22.5.
Turn that into a price and you get the Graham number: the square root of 22.5 × EPS × book value per share. A share below its Graham number passes the test; above it, it does not.
It is a quick screen from the 1970s, written for US industrial companies. For a Nepali bank it is a sanity check, not a target. Punji computes it only when EPS and book value are both positive and the reported figures look sound.
How it is calculated
Graham number = √(22.5 × EPS × Book value per share). Punji's gap = (Price − Graham number) ÷ Graham number, as a percent.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL: EPS Rs 28.36 and book value about Rs 247.28 give a Graham number of √(22.5 × 28.36 × 247.28) ≈ Rs 397.23. At a market price of Rs 534.90, the price sits 35% from it.
NABIL's share capital includes Rs 500.00 crore of preference shares, so per-share figures here use its 27,05,69,970 ordinary shares, as the filing does.
What good looks like
A price below the Graham number means the share meets Graham's defensive test on today's numbers. Many fine companies trade above it because of growth. Read it with ROE and NPL, never alone.
Watch out
- It uses EPS, which may be annualised from a part year.
- It says nothing about loan quality or capital; a cheap bank with rising NPL is cheap for a reason.
- Bonus shares change EPS and book value per share proportionally, so the Graham number falls with them.
- Loss-making companies or negative book value have no Graham number.
In Nepal
A Punji / textbook tool. No regulator in Nepal uses it. Punji's Valuation page lists banks furthest below their Graham number first, within a chosen sector.
Sources
Questions
Graham's two limits multiplied: a P/E of 15 and a P/B of 1.5. 15 × 1.5 = 22.5.
Punji does not give buy or sell advice. The Graham number is one screen; the four pillars tell you why a bank may be cheap.