Magic Formula
Joel Greenblatt's rules-based strategy that ranks stocks by cheapness (earnings yield) and quality (return on capital), then buys the best combined scorers.
What it is
The Magic Formula is a systematic value strategy from Joel Greenblatt's "The Little Book That Beats the Market." It scores each company on two factors: earnings yield (EBIT divided by enterprise value), which captures how cheap the business is, and return on capital (EBIT divided by net working capital plus net fixed assets), which captures how good the business is at turning capital into profit. Each stock gets a rank on both factors; the two ranks are added together, and the lowest combined totals (best on both) are bought as a diversified basket.
Why it matters
It packages two durable ideas, buy good businesses cheaply, into a mechanical, emotion-free process that backtested well over Greenblatt's sample period. The pitfall: it is not a single-stock picker. It only works as a basket of roughly 20-30 names held with patience, it deliberately excludes financials and utilities (whose balance sheets break the capital definition), and it can underperform the market for multiple years in a row, which causes most people to abandon it at exactly the wrong time. Backtested edges also tend to shrink once widely known.
How it's calculated
Compute each company's earnings yield as EBIT divided by enterprise value, and its return on capital as EBIT divided by the sum of net working capital and net fixed assets. Rank the whole universe separately on each factor (best gets rank 1), then add the two rank numbers together. The stocks with the lowest combined rank are the highest scorers; Greenblatt's original screen used US exchange-listed names above a minimum market cap and excluded financial and utility companies.
How Quintarthai uses it
Use the stock screener to sort a universe by earnings yield and return-on-capital style factors, then open any candidate's deep-analysis page to confirm the EBIT, enterprise value, and capital figures before treating it as a true Magic Formula pass. The Knowledge Base covers the component metrics like earnings yield and ROIC in separate entries.