Greenblatt Magic Formula


Magic Formula (MF) score. This factor was introduced by Joel Greenblatt in his bestseller: 'The little book that beats the market'. In this book, he explained that in order to get above-average returns, you should buy companies with above-average return on capital at below-average prices. To identify these companies, we rank the stock universe based on 2 factors:

  1. Earnings Yield: how much a business earns compared to its purchase price.
  2. ROC: how much a business earns compared to the capital needed to conduct the business.

We first rank these companies based on each of these ratios individually. Then we sum up the individual scores and rank the combined score.

Magic Formula = Rank ( Rank ( Earnings Yield ) + ( Rank ( ROIC ) )

The result of this calculation is the Magic Formula score. If the Earnings Yield or ROC cannot be calculated due to missing data, the company gets a score of 99999. The companies with the lowest MF score are the ones you should invest in according to Greenblatt's theory.

Greenblatt adds a few other conditions such as removing certain industries such as utilities and financials. We made it easy for you to reproduce this screen by adding it to our template screens. You can find more details about this screen here.

New! The Magic Formula is now fully dynamic and is calculated on a filtered stock universe using the filters specified in the Filter Menu. The filters taken into account are: countries, markets, industries, market cap, trading value, results age and currency.