What is the Graham Number for Cisco Systems?

Cisco Systems is currently trading at $50.57 per share and has a Graham number of $24.73, which implies that it is 104.5% above its fair value. We calculate the Graham number as follows:

√(22.5 * earnings per share * book value per share) = √(22.5 * 2.77 * 5.2) = 24.73

The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following:

Sales Revenue Should Be No Less Than $100 million.

For Cisco Systems, average sales revenue over the last few years has been $50,645,000,000, so according to the analysis the stock has impressive sales revenue.

Current Assets Should Be at Least Twice Current Liabilities.

We calculate Cisco Systems's current ratio by dividing its total current assets of $36,717,000,000 by its total current liabilities of $25,640,000,000 Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Cisco Systems’s current assets outweigh its current liabilities by a factor of 1.4 only.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since Cisco Systems’s debt ratio is 0.8, the company has healthy debt levels. We calculate Cisco Systems’s debt to net current assets ratio by dividing its total long term of debt of $8,416,000,000.00 by its current assets minus total current liabilities.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years.

Cisco Systems had negative retained earnings in 2019, 2020, 2021, 2022, during which time they averaged $7,702,620,689 Retained earnings are the are the sum of the current and previous reporting periods' net asset amounts, minus all divend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.

Cisco Systems has returned an average dividend yield of 2.9% over the last five years, having offered regular dividends since 2013.

The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.

To determine Cisco Systems's Eps growth over time, we will average out its Eps for 2009, 2010, and 2011, which were $1.05, $1.33, and $1.17 respectively. This gives us an average of $1.18 for the period of 2009 to 2011. Next, we compare this value with the average Eps reported in 2020, 2021, and 2022, which were $2.64, $2.50, and $2.82, for an average of $2.65. Now we see that Cisco Systems's Eps growth was 124.58% during this period, which satisfies Ben Graham's requirement.

It may be trading far above its fair value, but Cisco Systems satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it has:

  • impressive sales revenue
  • an average current ratio
  • healthy debt levels
  • negative retained earnings in 2019, 2020, 2021, 2022
  • a solid record of dividends
  • Eps growth in excess of Graham's requirements
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.