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Magic Formula Screener

Based on Joel Greenblatt's earnings yield + return on capital ranking. See the two component ranks separately — not just a black-box score.

Methodology — How the Magic Formula Works

Earnings Yield (EY)

EBIT divided by Enterprise Value (market cap + debt − cash). Higher is better — it means you’re getting more operating profit per dollar of total firm value. Greenblatt preferred this over P/E because it accounts for debt and uses operating income rather than net income.

Return on Capital (ROC)

EBIT divided by invested capital (net working capital + net fixed assets). Higher is better — it measures how efficiently a company generates profit from the capital deployed in the business. Companies with persistently high ROC tend to have durable competitive advantages.

Combined Rank

Each stock is ranked 1–N on EY (rank 1 = highest yield) and 1–N on ROC (rank 1 = highest return on capital). The combined rank is the sum of the two ranks. Lower combined rank = better Magic Formula score. A stock ranked #5 on EY and #8 on ROC scores 13 — better than a stock ranked #2 on one metric but #30 on the other.

Why It Works

By combining both metrics, the formula avoids the trap of buying cheap junk (high EY but poor business quality) or overpaying for quality (high ROC but expensive). In backtests, Greenblatt found the combined approach outperformed the S&P 500 over 17 years (1988–2004) by roughly 2× annually.

Source: Joel Greenblatt, “The Little Book That Still Beats the Market” (Wiley, 2010)

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By Basis Report Editorial DeskReviewed by Basis Report Methodology TeamMethodology

How to Use This Screener

Why Two Ranks Matter

Most screeners collapse Greenblatt's formula into one number, hiding why a stock qualified. Seeing the EY and ROC ranks separately lets you distinguish cheap-but-mediocre businesses (high EY, low ROC) from quality stocks at fair prices (high ROC, moderate EY). The combined rank rewards both dimensions equally.

Earnings Yield vs. P/E

Greenblatt used Earnings Yield (EBIT / Enterprise Value) rather than P/E for two reasons: EV accounts for debt so levered and unlevered companies compare fairly, and EBIT removes the distortion of interest expense and tax rates. A stock with 8% earnings yield is the inverse of a 12.5× EV/EBIT multiple.

Return on Capital vs. ROE

ROC uses invested capital (working capital + fixed assets) rather than book equity, which strips out financial leverage and goodwill. A company with 30% ROC is generating $0.30 of operating profit on every dollar of real business capital — regardless of how the balance sheet is financed. This makes cross-sector comparisons cleaner.

Next Steps After Screening

The Magic Formula is a starting list, not a buy signal. After identifying candidates, run a DCF analysis to stress-test assumptions, check the Altman Z-Score for financial distress, and read the most recent 10-K. Greenblatt recommended holding 20–30 stocks and rebalancing annually.

About the Magic Formula

Joel Greenblatt introduced the Magic Formula in his 2005 book, “The Little Book That Beats the Market” (updated 2010). The core insight: instead of buying only the cheapest stocks or only the highest-quality businesses, rank all stocks simultaneously on both dimensions and buy those that rank highly on both. In backtests covering 1988–2004, the approach returned roughly 30% annually compared to 12% for the S&P 500.

The formula deliberately ignores analyst ratings, price momentum, and qualitative factors. It assumes markets systematically misprice companies that are both cheap (high earnings yield) and good (high return on capital) — usually because of short-term uncertainty, boring businesses, or temporary earnings dips. This screener surfaces those candidates daily using live financial data.

For deeper analysis on any screened stock, the EV/EBITDA calculator lets you compare multiples against sector peers, and the comparable company analysis tool builds out a full trading comps table. The how to value a stock guide walks through all major valuation methods alongside each other.

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