Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * 5 year average earnings per share * book value per share), which for Cleveland-Cliffs gives us a fair price of $27.85. In comparison, the stock’s market price is $15.11 per share. Cleveland-Cliffs’s current market price is -45.7% below its Graham number, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.

The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of *The Intelligent Investor*. The analysis requires us to look at the following fundamentals of Cleveland-Cliffs:

*Sales Revenue Should Be No Less Than $500 million*

For Cleveland-Cliffs, average sales revenue over the last 6 years has been $10.97 Billion, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was $100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.

*Current Assets Should Be at Least Twice Current Liabilities*

We calculate Cleveland-Cliffs's current ratio by dividing its total current assets of $7.42 Billion by its total current liabilities of $3.55 Billion. 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. In Cleveland-Cliffs’s case, current assets outweigh current liabilities by a factor of 2.1.

*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 Cleveland-Cliffs’s debt ratio is -1.3, the company has much more liabilities than current assets. We calculate Cleveland-Cliffs’s debt to net current assets ratio by dividing its total long term of debt of $4.25 Billion by its current assets minus total liabilities of $10.71 Billion.

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

Cleveland-Cliffs had negative retained earnings in 2018, 2019, and 2020 with an average of $-486833333.3333333. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend 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*

We have no record of Cleveland-Cliffs offering a regular dividend within the last twenty years.

*A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years*

We are going to compare Cleveland-Cliffs's earnings per share averages from the two 'bookends' of the 16 year period for which we have data. The first bookend comprises the years 2007, 2008, and 2009, whose EPS values of $2.57, $4.76, and $0.82 average out to $2.72. Next we look at the years 2020, 2021, and 2022, whose values of $-0.32, $5.36, and $2.55 average out to $2.53. The growth rate between the two averages does not meet Graham's standard since it is -6.99%.

Based on the above analysis, we can conclude that Cleveland-Cliffs satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it is trading far below its fair value and has:

- impressive sales revenue
- an excellent current ratio
- much more liabilities than current assets
- negative retained earnings in 2018, 2019, and 2020
- an acceptable record of dividends
- decreasing earnings per share