How Do You Calculate Ferguson (FERG)'s Graham Number?

Ferguson does not have the profile of a defensive investment based on the requirements of Ben Graham. The Farm & Heavy Construction Machinery firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.

Ferguson Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 2 year average earnings per share (7.74) * 2 year average book value per share (22.91) = $63.16

At today's price of $127.89 per share, Ferguson is now trading 102.49% above the maximum price that Graham would have wanted to pay for the stock.

Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Positive Retained Earnings From 2021 To 2022, An Acceptable Record Of Dividends, and Eps Growth In Excess Of Graham'S Requirements

Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Ferguson had positive retained earnings from 2021 to 2022 with an average of $6,824,000,000 over this period.

Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.We only have 3 years of EPS on Ferguson, so it fails the Graham test on this basis alone, but we still think it's worthwhile to look at its growth over the available period. In 2020, the earnings per share was $4.24, while in 2022, it was $9.69. This give us a 128.54% growth rate during this period, which will satisfy Ben Graham's requirement if it continues on this trend.

Shareholders of Ferguson have received regular dividends since 2020. The company has returned a 3.17% dividend yield over the last 12 months.

Negative Current Asset to Liabilities Balance and an Average Current Ratio

Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Ferguson fails on both counts with a current ratio of 1.65 and a debt to net current asset ratio of -2.74.


According to Graham's analysis, Ferguson is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.

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.