The Magic Formula was defined in the excellent book by Joel Greenblatt called “The little book that still beats the market.” It lets you find good quality companies that are trading at an attractive price.
It does this by looking for companies with a high earnings yield (companies are undervalued) and a high return on invested capital (ROIC) (quality companies).
The formula then ranks the universe of companies on ROIC (where 1 is the company with the highest ROC), and by earnings yield (where 1 is the company with the highest earnings yield), and then sum the two ranks to give a combined score.
Companies with the lowest combined rank are recommended for purchase, usually the top 30 companies.
In the screener the Magic Formula value is called MF Rank.
How the ratios are calculated
Return on invested capital (ROIC) = EBIT/(net working capital + net fixed assets).
Earnings yield = EBIT / Enterprise value.
How to use the ratio
Available as a screening ratio: Yes
Available as an output column ratio: Yes (Look for it under the Valuation heading)
How to select the best Magic Formula companies
To find companies with the best Magic Formula ranking set the slider from 0% to 10%.
All ratios are calculated on a trailing 12 months (TTM) basis.
This means the last twelve months (not the company’s financial year) is compared to the same period in the past.
We do this to make sure that the screener data includes the latest, most up to date, financial results of the company.
Magic Formula back test
You can read more about the Magic Formula here: Magic Formula back test
Magic Formula alternative?
Here is an article that will interest you: A better alternative to the Magic Formula?
Neither Mr Greenblatt nor the website (magicformulainvesting.com) has endorsed this website or has had anything to do with it. We make our own calculations and we use our own database.