Graham's Formula for Intrinsic Value of a Stock

4 dni temu

➡About Benjamin Graham
Benjamin Graham is widely known as the Father of Value Investing. He was a professor, economist, and mentor to great investors like Warren Buffett. Graham’s investment philosophy focused on buying stocks below their intrinsic value to ensure a margin of safety and protecting capital even when markets behave irrationally. His books The Intelligent Investor and Security Analysis remain timeless classics in the world of investing.

➡His Formula to Calculate the Intrinsic Value of a Stock
Graham designed a simple mathematical model to estimate what a stock is truly worth- its intrinsic value.

Formula:

V=EPS×(8.5+2g)

Later, he modified it to account for changing interest rates:

V=[EPS×(8.5+2g)×4.4]/Y
​

Meaning of Each Value in the Formula

V: Intrinsic value or the fair value of the stock.
EPS: Earnings per share (trailing twelve months).
8.5: Base P/E ratio for a no-growth company.
g: Expected annual earnings growth rate (for next 7–10 years).
4.4: Average yield on high-grade corporate bonds when Graham proposed the formula.
Y: Current yield on AAA-rated corporate bonds (used to adjust for changing interest rate conditions).

➡How to Calculate
Let' sunderstand the calculations with the help of an example of NVDA stock:

EPS= 3.5 (TTM)
Growth rate= 32.8 (next 3-5years)
Y= 4.09
All other values remain the same

V= [3.5 x (8.5 + (2 x 32.8)) x 4.4] / 4.09
V= 279

So, the intrinsic value of the stock would be around 279
Current price= 186

Difference= 67%
Hence the Formula suggests that the current price is still way below its fair value and hence buyable.

➡Are these Too Aggressive Valuations?
Yes, it may be too optimistic. The term '2g' gives very high weightage to growth, which can inflate valuations quickly. In a world where corporate earnings growth is less predictable and global interest rates fluctuate, this approach may overvalue companies that appear to have strong growth potential on paper.

➡Relevance in the Current Market Scenario
While Graham’s formula is historically important and a great conceptual framework for understanding valuation, it should not be used as a standalone tool today. Markets are far more complex and influenced by globalization, technology, inflation, and interest rate cycles.

A more balanced approach is to use Graham’s principles (margin of safety, valuation discipline) but rely on modern valuation models like Discounted Cash Flow (DCF) or Relative Valuation Ratios and treat the formula as a learning foundation rather than a precise valuation tool.

What do you think about this tool for calculating a stock's valuation?
Is it still relevant?

Do 🚀 comment 💬

Disclaimer: I am not a valuation analysis expert so apply your due diligence while investing. The stock example taken in this educational post is just for demonstration purpose and not a buy/sell recommendation.

przedwczoraj

Uwaga

For META

EPS=27.54
g=16.7

V=[27.54 x (8.5 + 2x16.7) x 4.4]/4.09
=$ 1241

CMP=$ 738

Difference = 59%

According to Graham, the higher the difference the higher would be the safety factor as the stock would be below its fair value calculated through his formula.