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What Joel Greenblatt didn't tell you


Input

How It's Calculated

Return on Capital (ROC)

Operating Profit divided by Tangible Capital

Tangible Capital

Net Working Capital (NWC) + Net Fixed Assets (NFA)

Net Working Capital

(Current Assets - Cash/Equivalents) less

(Current Liabilities - Short-term Debt)

Net Fixed Assets

Long-Term Assets less goodwill and intangibles

Earnings Yield (EY)

Operating Profit divided by Enterprise Value

Enterprise Value

Market Cap + Total Debt - Cash and Equivalents

Market Cap

Shares Outstanding * Stock Price


To calculate the magic formula, rank firms by descending ROC and then again by descending EY. Then add the two rankings together and resort the combined rankings lowest to highest. The lowest combined rankings are the most attractive per the Magic Formula.

For ROC section:


  • If NWC is negative, use zero.
  • Operating Profit based on latest 12-month period.
  • Balance Sheet numbers based on most recent quarter.

For Earnings Yield section:


  • Operating Profit based on latest 12-month period.
  • Balance Sheet numbers based on most recent quarter.

This formula makes perfect sense,BUT my recommendation is:

check what stockholders equity and liabilities have done in the last 10 years.Did liabilities increase 10 times and stockholders equity decreased? something is probably wrong.

Check also number of shares outstanding.


PS: You can use morningstar and their financial statements to check 10 year history

By pelcmarek at 2009-04-21 11:39 | Stocks | pelcmarek's blog


Joel Greenblatt


The table below shows Validea’s 10-stock monthly rebalanced Greenblatt portfolio since they began tracking it in December of 2005.


By pelcmarek at Tue, 2009-04-21 12:31 | login or register to post comments