Composite Factors


The ERP5 rank is a screen designed by MFIE Capital that uses the following ratios to identify good companies that are trading at undervalued prices:

  • Return on Invested Capital (ROIC) - EBIT / (Net Working Capital + Net Fixed Assets).
  • Earning Yield - EBIT / Enterprise Value.
  • Price-to-Book Value - Market Capitalization / Book Value.
  • 5Y Trailing ROIC - five-year average EBIT / (Net Working Capital + Net Fixed Assets).

ERP5 summary

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The results show that the ERP5 rank is a factor that works very well when applied to small-cap companies, with the second-best results of all single factors we tested. Q1 results are substantially better than Q5. However, the results for small-cap companies are not completely linear.

What is worth noting is that the Q1 results for the ERP5 for all-size companies are higher than that of the MF rank. The ERP5 screen is particularly effective in identifying the market-beating small companies. It is also a very consistent factor, beating the market 83% of the time for small and medium-sized companies and 67% for large companies.