Graham number is one of the five method I use to estimate the fair value of a given company share that I am willing to pay. I have provided the formula I use and a very brief description. However, over the last few weeks, I have received questions requesting to help explain why this particular formula and is there any rationale on how this is derived. So here it is…..
Graham’s view was the price-to-earnings ratio should not be more than 15. At the same time, price-to-book value should not be more than 1.5. He also mentioned that it would be justifiable to have higher P/B ratio if PE ratio is below 15.
With this thought process, Graham proposed that the product of these two parameters should not be more than 22.5 Continue reading rest of this article…
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