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 Fastenal Company gives us a fair price of $15.29. In comparison, the stock’s market price is $56.04 per share. Therefore, Fastenal Company’s market price exceeds the upper bound that a prudent investor would pay for its shares by 266.5%.

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 Fastenal Company:

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

For Fastenal Company, average sales revenue over the last 6 years has been $8.04 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 Fastenal Company's current ratio by dividing its total current assets of $3.12 Billion by its total current liabilities of $789.8 Million. 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 Fastenal Company’s case, current assets outweigh current liabilities by a factor of 4.0.

*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 Fastenal Company’s debt ratio is 0.2, the company has too much debt. We calculate Fastenal Company’s debt to net current assets ratio by dividing its total long term of debt of $353.2 Million by its current assets minus total liabilities of $1.39 Billion.

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

Fastenal Company had positive retained earnings from 2008 to 2022 with an average of $1.99 Billion. 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*

Fastenal Company has offered a regular dividend since at least 2011. The company has returned an average dividend yield of 2.3% over the last five years.

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

To determine Fastenal Company's EPS growth over time, we will average out its EPS for 2009, 2010, and 2011, which were $0.62, $0.90, and $1.21 respectively. This gives us an average of $0.91 for the period of 2009 to 2011. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $1.49, $1.60, and $1.89, for an average of $1.66. Now we see that Fastenal Company's EPS growth was 82.42% during this period, which satisfies Ben Graham's requirement.

It may be trading far above its fair value, but Fastenal Company actually meets most of Benjamin Graham's criteria for an undervalued stock because it has:

- impressive sales revenue
- an excellent current ratio
- too much debt
- positive retained earnings from 2008 to 2022
- an acceptable record of dividends
- EPS growth in excess of Graham's requirements