Benjamin Graham's checklist in plain English

Benjamin Graham's The Intelligent Investor first appeared in 1949 and was revised repeatedly over the following decades. The checklist most often attributed to him — seven tests a stock should pass before a “defensive” investor buys it — is set out in the chapter on stock selection for the defensive investor. It is a screen designed to disqualify, written for someone who does not want to spend their life on this and does not want to be ruined by it either.

The tests have not become less useful. They have become less used, because running them honestly means seven separate lookups per company, and almost nobody has the evening.

The seven tests, and what each is really asking

1. Adequate size

Graham wanted a floor on size, expressed in the dollars of his day. The reasoning was not that big companies are better businesses; it was that small ones fail more abruptly, are more easily disrupted by one bad year, and are harder to analyze from public documents alone. Modern implementations restate the threshold in current dollars — a market capitalization above a couple of billion is a common contemporary reading. The test is about survivability, not quality.

2. A sufficiently strong financial condition

Graham's version was concrete: for an industrial company, current assets of at least twice current liabilities, and long-term debt no greater than net current assets. In plain English, can this company pay what it owes in the next year twice over, and is its long-term borrowing modest relative to its working capital? Contemporary screens often express the same idea through a leverage ratio such as debt to equity, because balance sheets are structured differently now. The question being asked is unchanged: does this company have to be rescued if a year goes badly?

3. Earnings stability

Graham asked for positive earnings in each of the past ten years. Not growth — merely the absence of a loss. It is a low bar that a surprising number of well-known companies fail, and that is precisely its value: it filters out businesses whose earnings power appears and disappears with the cycle.

4. A dividend record

Graham wanted uninterrupted dividend payments over a long stretch — his own bar was twenty years. The dividend mattered to him less as income than as evidence: a company that has paid one continuously through recessions has demonstrated something about the durability of its cash generation that no ratio can. This is the test that has aged the least gracefully, and we will come back to it.

5. Earnings growth

A minimum increase in per-share earnings across a decade — Graham's formulation was at least a third over ten years, measured using three-year averages at each end rather than single years, so that one good or bad year at either boundary could not distort the comparison. Note how modest the requirement is. He is not looking for a growth company; he is checking that the business has not been standing still while inflation eroded it.

6. A moderate price-to-earnings ratio

Graham capped the price at fifteen times earnings, and specified average earnings over the past three years rather than the most recent year — a detail almost always dropped in modern versions, and one that does real work, because it prevents a peak year from making a stock look cheap.

7. A moderate ratio of price to assets

Price no more than one and a half times book value. Graham also offered a combined version: the product of the price-to-earnings ratio and the price-to-book ratio should not exceed 22.5 — which is simply 15 multiplied by 1.5. That formulation lets a company pass with a higher P/E if its price-to-book is correspondingly lower, which is more flexible and, in practice, more useful than applying both caps rigidly.

The Graham Number, and where it comes from

That combined test is where the “Graham Number” originates. If price-to-earnings multiplied by price-to-book must not exceed 22.5, then the price at which both tests sit exactly at their boundary is the square root of 22.5 multiplied by earnings per share multiplied by book value per share.

It is worth being precise about what that is. It is not a valuation model, and it makes no attempt to describe what a business is worth. It is the highest price at which the last two tests on the checklist are still satisfied — a ceiling on what a defensive investor should pay, derived from two rules of thumb. Treating it as an intrinsic value estimate credits it with far more than it claims.

The formula people confuse with the checklist

Separately from the seven tests, Graham discussed a shorthand formula for the value of a growing business, usually written as earnings per share multiplied by the sum of a base multiple and twice the expected growth rate. He was explicit that it was a simplification offered to illustrate how the market prices growth, not a tool he was recommending as a valuation method.

He also observed that any such formula has to account for prevailing interest rates, and the versions circulating today typically adjust the result by the ratio of a long-run high-grade bond yield to the current one. The logic is worth holding onto even if the formula is not: what you can earn risk-free is the alternative to owning the business, so when bond yields rise, the value of a given stream of future earnings falls. A valuation method that ignores the rate environment is quietly assuming one.

How to use a mid-century checklist in 2026

Two of the seven tests genuinely need translating, and it is worth being explicit about which and why:

• The size threshold. Graham's dollar figure is meaningless without restating it in today's money. Doing so is honest translation, not weakening the test.
• The dividend record. A twenty-year unbroken record excludes most of the technology sector — not because those businesses are fragile, but because the convention for returning cash shifted toward buybacks. Reading the test as “does this company return cash to shareholders, and has it done so consistently?” preserves Graham's intent better than reading it literally.

And here is what should not be translated: the moment you find yourself loosening a threshold because a company you like keeps failing it, the checklist has stopped working. Its entire value is that it is indifferent to your enthusiasm. A price-to-book cap of 1.5 is nearly impossible for an asset-light business to satisfy — and the correct response is to record that it fails, understand why, and decide whether you are comfortable owning something the checklist rejects. Not to move the cap.

A failed test you understand is worth more than a passed test you engineered.

What the checklist is for

It is a disqualifier, not a buy list. Nothing about passing seven of seven makes a company a good investment; it makes it a company whose obvious ways of being fragile have been checked. Passing two of seven is not a verdict either — it is a prompt to find out which two, and whether the five failures are structural or incidental.

Used that way, the checklist does something a valuation cannot. It tells you where to look next.

How Hety handles this

Hety runs all seven criteria on every company it covers and states the company's own figure against the threshold in a sentence, so a failure tells you how badly and a pass tells you by how much — adequate size, low debt to equity, earnings stability, dividend record, earnings growth, a moderate price-to-earnings ratio and a moderate price-to-book. Alongside them it computes the Graham Number from the same record, and a Graham intrinsic value that uses today's bond yield rather than a fixed historical constant, so the figure moves when the rate environment does. When Graham's method and Hety's own two-method range disagree sharply, the disagreement is itself the finding, and both numbers are shown rather than the flattering one.