How this instrument works
Benjamin Graham introduced this shortcut in the 1962 edition of The Intelligent Investor as a way to fold two figures — trailing earnings per share and an assumed growth rate — into a single price a defensive investor could compare against the market. It is a different tool from the Graham Number: that one prices a stock against book value per share for a no-growth buyer, while this formula prices growth itself, treating an optimistic assumption as a direct source of value rather than something to be screened out.
The formula is a straight line in the growth rate, not a curve. The 8.5 is the price-to-earnings multiple Graham assigned a company with zero expected growth, and every additional point of expected annual growth adds exactly two points to that multiple. That rate is entered as a whole number — 8 for an 8% figure, not 0.08 — because the formula expects it already stated as a percentage, and a decimal entered by habit collapses the multiple to barely above 8.5.
Graham revised the formula a second time, multiplying the result by 4.4 and dividing by the current yield on AAA corporate bonds, so the multiple would shrink when interest rates rose and expand when they fell. This sheet computes the earlier, simpler version, which holds the multiple fixed no matter what bonds are yielding. Graham also grew wary of that term itself later in life, cautioning that a single projected growth rate carried years into the future is a guess dressed up as arithmetic.
- Enter Earnings per share, $ — use trailing twelve-month EPS from the latest income statement, not a forward estimate.
- Enter Expected growth rate, % as a whole number, such as 8 for 8% — the annual rate Graham expected to hold over roughly the next seven to ten years.
- Read Intrinsic value (Graham simplified formula) — the instrument multiplies EPS by 8.5 plus twice the growth rate.
- Change that rate alone and watch the result move — each extra point assumed adds two full points to the multiple applied to EPS.
Worked example — $4 EPS at an 8% growth rate
Take a company reporting $4.00 in trailing earnings per share, with an expected annual growth rate of 8%. Inside the formula that becomes 2 × 8 = 16, added to Graham's baseline no-growth multiple of 8.5, for a combined multiple of 24.5. Multiply that multiple by the $4.00 EPS and the intrinsic value comes out to $98.00.
That $98.00 is not a forecast of the stock's future price — it is what Graham's simplified formula says $4.00 of current earnings is worth once an 8% growth assumption is priced directly into the multiple. Raise that assumption to 10% instead and the multiple climbs to 28.5, pushing the same $4.00 of earnings to $114.00 — two extra assumed points move the answer by 16%, more than most single-year swings in actual reported earnings.
Questions
Why does the formula use 8.5 as its starting multiple?
Graham set 8.5 as the price-to-earnings multiple appropriate for a company with no expected growth at all — his estimate of what a share is worth on its earnings power alone, before any assumption about the future is added. Every additional point of that kind then adds two points on top of the baseline, so 8.5 is the floor the rest of the formula builds on, not an arbitrary constant.
Should I enter the growth rate as 8 or 0.08?
Enter it as 8, not 0.08. The formula expects the rate already stated as a whole-number percentage, so 0.08 turns that term into roughly 0.16 instead of 16, leaving the multiple barely above the no-growth baseline of 8.5 and understating intrinsic value by nearly the entire growth premium.
How is this different from the Graham Number?
The Graham Number prices a stock against book value per share for a defensive, no-growth buyer and takes no growth input at all. This formula instead prices an explicit assumption directly into the multiple, using only earnings per share and an expected growth rate — the two calculators answer different questions from different inputs, and one company can produce very different figures on each.
Does this figure include an adjustment for interest rates?
No. Graham later revised the formula to multiply the result by 4.4 and divide by the current yield on AAA corporate bonds, so the multiple would shrink when rates rose and grow when they fell. This sheet computes the original, simpler version, which holds the multiple fixed no matter what bonds are yielding at the time — useful for a quick comparison, less so across periods of sharply moving rates.
Where does the growth rate assumption actually come from?
It has to be supplied — the formula has no way to generate one on its own. Graham intended it as a projected annual earnings growth rate over roughly the next seven to ten years, typically drawn from analyst estimates, a company's own guidance, or a trailing growth trend judged likely to continue. The honesty of the output depends entirely on the honesty of that single assumed number.
Why did Graham warn against leaning on this formula?
Late in life Graham cautioned that projecting a single growth rate years into the future turns a precise-looking calculation into a guess dressed up as arithmetic. The formula is linear in growth, so an overly optimistic assumption compounds directly into an inflated value, with nothing in the math itself to catch the error — the check has to come from questioning that number, not the formula.
References
- Columbia Business School — Heilbrunn Center for Graham & Dodd Investing
- SEC Investor.gov — investing basics glossary
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.