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Joel Greenblatt Magic Formula Calculator

The two Magic Formula metrics: earnings yield (EBIT/EV) and return on capital (ROC).

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Also available in German: Joel-Greenblatt Magic-Formula Rechner →

Inputs

EBIT (m)

EBIT (operating profit)

Also called: Operating income, earnings before interest & taxes

Where to find it: Income statement (middle), before interest and taxes.

How to derive: Revenue − operating costs (or: net income + interest + taxes).

Market cap (m)

Market capitalization

Also called: Market cap, MVE (market value of equity)

Where to find it: Shown prominently on any stock overview page.

How to derive: Share price × shares outstanding.

Net debt (m)

Total debt

Also called: Interest-bearing debt, borrowings

Where to find it: Balance sheet: short-term + long-term borrowings (bonds, loans).

How to derive: Add short-term and long-term interest-bearing debt.

Net working capital (m)

Working capital

Also called: Net working capital

Where to find it: From the balance sheet: current assets − current liabilities.

How to derive: Current assets − current liabilities.

Net fixed assets (m)

Net fixed assets

Also called: Net PP&E, property, plant & equipment

Where to find it: Balance sheet, non-current assets: “property, plant and equipment”, net.

How to derive: Land, buildings and machinery minus accumulated depreciation.

Result, live

Earnings yield (EBIT/EV)

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Return on capital (ROC)

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The Magic Formula buys the best COMBINED rank of both - cheap AND good businesses. Single values mean little; the universe rank is what matters.

Joel Greenblatt's Magic Formula judges a stock on two things: how cheap it is (earnings yield) and how good the business is (return on capital). You buy what ranks highest on the two combined. This calculator gives you both metrics instantly.

How the formula works

Earnings yield relates operating profit (EBIT) to enterprise value; return on capital measures how much EBIT the deployed capital produces:

Earnings yield = EBIT ÷ enterprise value (market cap + net debt)
Return on capital = EBIT ÷ (net working capital + net fixed assets)

Example: EBIT $800m, EV = 9,000 + 1,500 = $10,500m → EY 7.6%. Capital = 900 + 2,400 = $3,300m → ROC 24.2%.

How to read the result

Both metrics have their own thresholds:

Earnings yield above 8%: cheap; 5–8% average; below 5% expensive.
Return on capital above 25%: excellent business; 12–25% decent; below that capital-heavy/weak.

The combination is what counts: the Magic Formula buys the best blend of both ranks, cheap AND good businesses.

What to watch out for

Single values mean little: it is a ranking strategy across the whole universe, not a verdict per stock.
Banks and utilities are excluded because EBIT/EV is distorted there.
EBIT is backward-looking: a high yield can be a value trap if profit collapses.

Frequently asked questions

What are good Magic Formula values?

As a rule of thumb, an earnings yield above 8% and a return on capital above 25% are strong. More important, though, is the combined rank against other stocks, not the single number.

Which companies does the formula exclude?

Greenblatt leaves out banks, insurers and usually utilities, because their balance sheets distort EBIT/EV and return on capital. The model is built for normal operating companies.

How do I apply the ranking to many stocks?

You would compute both metrics for your entire universe and add the ranks. In our Fair Value Calculator, EBIT/EV and return on capital are already on file for 40,000+ stocks, no typing required.

What is Joel Greenblatt's Magic Formula?

The Magic Formula is a stock-picking rule Joel Greenblatt introduced in 2005 in his book “The Little Book That Beats the Market”. It ranks all stocks on two metrics: earnings yield (EBIT ÷ enterprise value), which shows how cheap a stock is, and return on capital (EBIT ÷ net working capital plus net fixed assets), which shows how good the business is. The two ranks are added up; you buy the roughly 20 to 30 stocks with the best combined score and hold each for about a year. With this calculator's starting values the result is an earnings yield of 7.6% and a return on capital of 24.2%.

How well has the Magic Formula performed?

In his book Greenblatt reports a return of 30.8% a year from 1988 to 2004, against 12.4% for the S&P 500, measured across the 3,500 largest US companies; for the 1,000 largest it was 22.9%. These figures come from his own backtest. Greenblatt himself writes that the formula can trail the market for several years in a row, which is exactly when many investors give up. Past returns are no promise for the future.