Graham's Number

This is something we've talked about previously at one of our meetings and while it is important to understand, there are only few investors who really do know about it and that is unfortunate.

Graham's Number is named after Professor Benjamin Graham, the author of such books as The Intelligent Investor as well as Security Analysis. But Benjamin Graham is probably even more famous as Warren Buffett's mentor at Columbia University.

Graham's Number is defined as "net current asset value" and you can find it in Value Line where it is referred to as net working capital.

How do we arrive at Graham's Number?... Just subtract Total Liabilities from Current Assets.

And what does this tell you?... If the resulting number is positive, this could be an indication that the company in question is a very conservatively financed company. And if the market cap of the particular stock (which you get by multiplying the total number of shares outstanding by the stock's share price) is less than Graham's Number, this could be an indicator that you are about to make some serious money!

Graham's number is usually negative for most companies, however, when Graham's Number is positive, it can be a very good thing because that usually means the company has plenty of liquid assets on hand that are free and clear of any and all liabilities.

This is a very good tool to use whenever you are studying any company's balance sheet!

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