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Magic Formula Stock Screener Formula Breakdown
Operating Earnings Before Interest and Taxes (operating profit).
Market Cap + Total Debt - Cash & Cash Equivalents.
Operating earnings generated per dollar of enterprise acquisition price (pre-tax P/E inverse).
Operating efficiency: how much operating profit is produced for every dollar of tangible capital employed in operations.
How to Calculate Magic Formula Step-by-Step
Retrieve Operating Income (EBIT) and Enterprise Value from verified financial statements.
Calculate tangible capital employed (Net Working Capital + Net Fixed Assets / Property, Plant & Equipment).
Compute Earnings Yield % = (EBIT / EV) × 100.
Compute Return on Capital % = (EBIT / Tangible Capital) × 100.
Assign a Magic Formula investment grade (Grade A, B, C, or D) based on combined threshold criteria.
How to Interpret the Result
Frequently Asked Questions
What is Joel Greenblatt's Magic Formula?
The Magic Formula is a systematic value investing strategy published by hedge fund manager Joel Greenblatt that ranks stocks by two factors: Return on Capital (business quality) and Earnings Yield (cheapness).
What is a good Earnings Yield in Magic Formula?
An Earnings Yield above 8% to 10% is considered attractive, especially when compared to risk-free 10-year Treasury yields.
Why does the Magic Formula exclude banks and utilities?
Banks and financial firms have balance sheets dominated by debt and deposits, making enterprise value and tangible capital metrics non-comparable to operating companies.
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