In the world of value investing, few formulas have stood the test of time quite like the Graham Number. Named after Benjamin Graham, the father of value investing and mentor to Warren Buffett, this simple valuation metric has guided generations of investors. But with the Australian share market evolving rapidly and 2025 bringing new economic and regulatory shifts, does the Graham Number still stack up as a practical tool for local investors?
What Exactly is the Graham Number?
The Graham Number is designed to estimate a ‘fair value’ for a stock by blending two key fundamentals: earnings per share (EPS) and book value per share (BVPS). The formula:
- Graham Number = √(22.5 × EPS × BVPS)
The constant 22.5 is a product of Graham’s suggested maximums: a price-to-earnings (P/E) ratio of 15 and a price-to-book (P/B) ratio of 1.5. If a stock trades below its Graham Number, it might be considered undervalued – at least in theory.
For example, consider an ASX-listed industrial company in 2025 with:
- EPS: $2.50
- BVPS: $18.00
Graham Number = √(22.5 × 2.5 × 18) ≈ $31.77
If the stock is trading at $27, value investors may see an opportunity. But how does this stack up in today’s market?
Graham Number in the Modern Australian Context
Australia’s equity landscape has shifted since Graham’s era. The ASX is home to more tech, healthcare, and service-oriented businesses, many of which have lighter balance sheets and higher growth rates. With the Australian Prudential Regulation Authority (APRA) tightening capital requirements in 2024 and global inflation easing, the local market has become both more cautious and growth-oriented.
Current challenges for the Graham Number in 2025 include:
- Capital-light business models: Many successful Australian companies now have few physical assets, making book value less meaningful.
- Regulatory shifts: New APRA and ASIC reporting standards have changed how earnings and book value are reported, potentially distorting historical comparisons.
- Interest rate environment: With the RBA’s cash rate stabilised at 3.10% after the 2024 cuts, some traditional valuation anchors have shifted, affecting what constitutes a ‘fair’ P/E or P/B ratio.
Despite these changes, the Graham Number can still serve as a useful quick filter for stocks in sectors like banking, insurance, or industrials—where tangible assets and consistent profits remain the norm.
When (and When Not) to Use the Graham Number
While the Graham Number’s simplicity is appealing, it’s far from foolproof—especially in 2025. Here’s how Australian investors are using it wisely:
- As a screening tool: Many portfolio managers still use the Graham Number to flag potentially undervalued stocks for further research, particularly among the ASX 200’s more traditional sectors.
- Not for tech and growth stocks: Fast-growing companies often reinvest earnings and show low book values, so the Graham Number may underestimate their potential.
- Supplemented by other metrics: Combining the Graham Number with modern valuation tools—like discounted cash flow (DCF) analysis or EV/EBITDA multiples—provides a more rounded picture.
For example, in 2025, a major Australian insurer trading at a price below its Graham Number might warrant a closer look, especially if it has a strong regulatory capital position and stable earnings history. Conversely, a high-growth medtech company with negligible book value would render the Graham Number almost meaningless.
Limitations and Common Pitfalls
No valuation tool is infallible. The Graham Number assumes:
- Reliable, consistent earnings (which aren’t always the case, especially post-COVID-19 and amid 2025’s sector rotations).
- Book value accurately reflects economic value (not always true with intangibles, goodwill, or rapidly depreciating assets).
- The 22.5 constant applies across all industries and market cycles (a big leap in today’s diverse, globalised ASX).
Relying solely on the Graham Number can lead to ‘value traps’—stocks that look cheap by the numbers but face structural headwinds or shrinking markets.
Conclusion: Still a Tool for the Toolbox
The Graham Number remains a useful, low-tech way to spot potential bargains in certain corners of the Australian market. But in 2025, its best use is as a starting point, not a final verdict. By blending Graham’s timeless principles with modern analysis and an understanding of local policy shifts, Aussie investors can make sharper, more informed decisions—without falling for outdated shortcuts.
