How Graham’s formula turns earnings into a value
Graham’s revised formula starts from a simple premise: a company with no growth still deserves some multiple of its earnings, and faster growth deserves more. It assigns a base price-to-earnings ratio of 8.5 to a no-growth business, adds twice the expected growth rate to that multiple, then scales the whole thing by the ratio of a historical high-grade bond yield to today’s yield. The output is a single per-share figure you can compare against the current price to gauge whether a stock looks cheap or rich. For a more granular, cash-flow-based estimate, see theDCF calculator.
Graham’s revised formula
Intrinsic value = EPS × (8.5 + 2g) × 4.4 ÷ Y
where EPS = earnings per share, g = expected annual earnings growth (as a percentage number, e.g. 7 for 7%),8.5 = the base price-to-earnings multiple for a no-growth company, 4.4 = the AAA corporate bond yield from Graham’s era, and Y = the current AAA corporate bond yield. The 4.4 ÷ Y term adjusts the valuation up or down for today’s interest rates.
What makes this calculator different
- It applies the bond-yield adjustment. The 4.4 ÷ Y term scales the result to current AAA corporate bond yields, so the value reflects the rate environment you are actually investing in.
- It shows both base and adjusted value. You can see the unadjusted figure alongside the yield-adjusted one, making it clear how much interest rates are moving the answer.
- It gives a margin of safety versus price. Comparing the estimate against the current share price tells you whether the stock is trading below or above its intrinsic value, and by how much.
- It warns about growth sensitivity. Because the growth rate g enters the formula directly, small changes can swing the result sharply — the calculator flags this so you treat the output with care.
Frequently asked questions
What is intrinsic value?+
Intrinsic value is an estimate of what a share is really worth based on the company’s fundamentals — chiefly its earnings and how fast they are expected to grow — rather than on what the market happens to be paying for it today. The idea, central to value investing, is that price and worth can drift apart, and that buying below intrinsic value gives you a cushion. This calculator estimates intrinsic value from earnings per share and an expected growth rate using Benjamin Graham’s revised formula.
What is Graham’s revised formula?+
Benjamin Graham’s revised formula is Intrinsic value = EPS × (8.5 + 2g) × 4.4 ÷ Y. Here EPS is trailing earnings per share, 8.5 is the price-to-earnings multiple Graham assigned to a no-growth company, and g is the expected annual earnings growth rate (as a number, so 7% growth is g = 7). The factor 4.4 is Graham’s baseline yield on high-grade (AAA) corporate bonds at the time he wrote, and Y is the current AAA corporate bond yield, which scales the result to today’s interest-rate environment.
Why divide by the bond yield?+
The 4.4 ÷ Y term adjusts the valuation for prevailing interest rates. Bonds are the main alternative to stocks, so when high-grade bond yields are high, future corporate earnings are worth less today and the multiplier shrinks; when yields are low, the same earnings justify a higher price and the multiplier grows. Dividing by the current yield Y and multiplying by Graham’s historical baseline of 4.4 keeps the formula anchored to his era while flexing with the rate environment you actually face.
How is this different from a DCF?+
A discounted cash-flow (DCF) model projects a company’s free cash flows year by year, then discounts each back to the present at a chosen rate — it is detailed but demands many assumptions. Graham’s formula is a quick rule of thumb that collapses all of that into a single multiple driven by current earnings and one growth number. Use it for a fast sanity check; reach for a full DCF when you want to model cash flows explicitly.
What are its limitations?+
The formula is very sensitive to the growth estimate g, which enters linearly and can swing the result dramatically — a few percentage points of assumed growth can change the answer by a large margin. It also relies on a single EPS figure, ignores debt, cash, and cyclicality, and was designed for a different market era. Treat its output as a sanity check or starting point, not a precise target price, and pair it with broader analysis before making any decision.
Disclaimer: This calculator is foreducation and illustration only. Graham’s revised formula is a rule of thumb built on simplifying assumptions and is highly sensitive to the growth rate you enter; its output is a sanity check, not a precise target price, and real intrinsic values will differ. Nothing here is investment, tax, or trading advice.