The Graham formula is Benjamin Graham’s shorthand for valuing a growing company, published in The Intelligent Investor. It says a share is worth its earnings per share multiplied by a P/E that rises with the growth expected of those earnings: 8.5 times for a business growing not at all, and two more points of multiple for every percentage point of annual growth.
Graham later added a correction for the level of interest rates, because the same earnings are worth more when bonds pay little and less when they pay a great deal. The revision multiplies the result by 4.4 divided by the current corporate bond yield — 4.4 being the AAA yield prevailing when he calibrated it.
It is not the same thing as the Graham number, a separate rule of thumb built from earnings and book value as a ceiling on what a defensive investor should pay.
g is expected annual earnings growth and Y the current corporate bond yield, both in percent — a company growing at 7% takes g = 7, not 0.07. Feeding a fraction in is the single most common way to get an answer that is wrong by an order of magnitude.
A company earning $5.00 per share, expected to grow earnings at 6% a year:
With bond yields at 6% rather than the 4.4% Graham calibrated on, the revision scales that down:
The same earnings and the same growth, worth a quarter less because the alternative available in bonds pays more. That correction is the part of the formula most often dropped, and it is the part that keeps it from being a permanent argument for buying equities.
Use it as a first pass, not a conclusion. Its virtue is that it takes two inputs and can be done in your head, which makes it an excellent way to sort a long list before spending an afternoon on a discounted cash flow.
Be conservative with g. The multiplier is linear and unbounded, so an optimistic growth figure does not merely raise the answer, it raises it without limit; growth much above 15% a year pushes the formula past the range it was built for. Graham himself intended the figure as a durable long-run rate, not last year’s.
In the app, Ben Graham is one of the four methods on the Intrinsic Value tab, with the bond yield as an editable figure you keep current and the 1974 adjustment as a switch.
It is most useful on a consistently profitable company with an earnings record long enough to justify a growth estimate, and as a cross-check on methods that produce a very different answer: where a cash-flow model and this formula disagree by a factor of three, one of them is being driven by an assumption worth naming out loud.
It needs positive earnings and is useless without them. It says nothing about debt, nothing about cash generation and nothing about the quality of the earnings it multiplies — an accounting-flattered profit values exactly as well as a real one. The constants are a calibration from mid-century American markets, not a law, and the growth term is linear where reality is not. Treat it as a well-aged rule of thumb that has kept its reputation by being applied cautiously.