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Greenblatt's magic formula breakdown

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.

By GordonGekko at 2006-11-25 19:00 | Stocks | GordonGekko's blog


Magic Formula

I just wanted to add some notes I had made last year after dissecting his website:

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.
By Theo at Sun, 2006-11-26 02:29 | login or register to post comments

Add Some Research

Theo, those are useful observations.  Thanks for that.

I believe that for experienced investors, the Magic Formula is best used as a screening tool.  Add some research and due diligence and you should be left with a list of promising and timely investments.  That's the theory behind my website:

http://www.magicdiligence.com

I do the research and list the most promising investments.
By MagicDiligence at Fri, 2008-02-08 09:43 | login or register to post comments