ERP5 is an investment strategy that finds undervalued companies based on the following four ratios:
- Earning Yield (EBIT / Enterprise Value) – Profits before interest and taxes compared to enterprise value
- Return on Invested Capital - ROIC - (EBIT / (Net Working Capital + Net Fixed Assets)) – The return a company generates on the capital invested in the business.
- Price to Book (Market value / Book value) – share price compared to the book value of the company
- 5-year average Return on Invested Capital – Five year average EBIT to Five year average ((Net working capital) + Net Fixed Assets)
To calculate the ERP5 ranking you simply rank each company against all the other companies based on all four ratios.
Once you have ranked all the companies you add the individual rankings, for all four ratios, together to give you one combined ranking for each company.
You then rank all the companies by this combined ranking. Thus the lower the ERP5 ranking number the better.
The strategy's name ERP5 comes from the first letter of the 4 ratios.
How to use the ratio
Available as a screening ratio: Yes
Available as an output column ratio: Yes
How to select the best ranked ERP5 companies
To find the best ERP5 ranked companies set the slider from 0% to 10%.
The ERP5 rank of more than 22,000 companies is available in the Quant Investing stock screener.
More information about the ERP5 investment strategy
You can find more information on the ERP5 rank investment strategy here:
How and why to implement the ERP5 investment strategy in your portfolio
ERP5 and Momentum Investment Strategy
ERP5 investment strategy back test
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