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Greenblatt-Style Magic Formula
By Maksym Lytvynov · Rules as of (v23)
Joel Greenblatt's Magic Formula as The Little Book That Beats the Market defines it: rank every eligible company by earnings yield and by return on capital, add the ranks.
Score output: Strong / Attractive / Neutral / Reject, with a 0–10 score
What is the Greenblatt Score?
The Greenblatt score ranks every eligible company in our coverage twice — by earnings yield (EBIT over enterprise value, a measure of cheapness) and by return on capital (EBIT over the working capital and fixed assets the business needs, a measure of quality) — and adds the two ranks, as the book does. The lowest sum is the best. A company's 0–10 score is its position in that list. It is one of three models on the Value axis.
How does the Greenblatt Score work?
Earnings yield = EBIT / enterprise value: ranked across the eligible universe; enterprise value = market cap + debt + preferred + minority interest − cash not needed to run the business; EV ≤ 0 is left out. EBIT sets aside tax rates and capital structure, and enterprise value counts everything an owner of the whole business would pay for.
Return on capital = EBIT / (net working capital + net PP&E): ranked across the eligible universe; working capital excludes cash and short-term debt and is floored at 0; capital below 1% of revenue is not meaningful and is left out. Goodwill and other intangibles are left out, as the book specifies.
Every eligible company is ranked by earnings yield (highest = 1) and by return on capital (highest = 1); the two ranks are added and the list ordered by the sum, ties going to the higher earnings yield. The 0–10 score is 10 × the share of the eligible universe ranked below the company.
Greenblatt leaves out financial and utility stocks, and so does the model: it does not rate banks, insurers, asset managers, holding companys, utilitys, reits. Utilities and financial companies are left out, as the book does; REITs too, because their real estate is the capital and return on capital becomes a property yield.
What does Greenblatt look for in a stock?
Each criterion as the scoring code evaluates it, with the threshold it uses and where that threshold comes from.
Earnings yield = EBIT / enterprise value
- Passes when
- ranked across the eligible universe; enterprise value = market cap + debt + preferred + minority interest − cash not needed to run the business; EV ≤ 0 is left out
- Applies to
- Every profile the model rates
- Source
- The Little Book That Beats the Market (2006), ch. 6 and appendix
Return on capital = EBIT / (net working capital + net PP&E)
- Passes when
- ranked across the eligible universe; working capital excludes cash and short-term debt and is floored at 0; capital below 1% of revenue is not meaningful and is left out
- Applies to
- Every profile the model rates
- Source
- The Little Book That Beats the Market (2006), ch. 6 and appendix
- Utilities and financial companies are left out, as the book does; REITs too, because their real estate is the capital and return on capital becomes a property yield.
How the Greenblatt score maps to a status
| Status | Rule |
|---|---|
| Strong | combined rank in the top 20% |
| Attractive | the next 20% |
| Neutral | the middle 30% |
| Reject | the bottom 30% |
The book buys from the top of the list; the band cut-offs are ours.
Which companies Greenblatt rates
| Sector profile | Rated | Note |
|---|---|---|
| General | Yes | — |
| Bank | Not applicable | Greenblatt does not rate banks |
| Insurer | Not applicable | Greenblatt does not rate insurers |
| Asset manager | Not applicable | Greenblatt does not rate financial companies: EBIT and working capital mean nothing for a balance sheet that is the business |
| Holding company | Not applicable | Greenblatt does not rate financial companies: EBIT and working capital mean nothing for a balance sheet that is the business |
| Utility | Not applicable | Greenblatt does not rate utilities |
| REIT | Not applicable | Greenblatt does not rate REITs: their real estate is the capital, so return on capital is a property yield |
“Not applicable” means the model is left out of that company's axis — never scored as zero or as neutral.
How AlphaStocks uses Greenblatt
Inside the Value axis the weights are Graham Defensive-Investor Criteria 45%, Lynch Categories and PEG 25%, Greenblatt Magic Formula 30% (general profile; the sector profiles shift them — see the methodology page). Only the models that apply to a company and have a score are averaged, re-weighted among themselves; a model that does not apply is left out, never counted as zero. The Value axis carries 10% of the composite. The Value axis also sets Timing (15%), which is the lower of Value and Momentum.
Ranking is the method. Adding the two raw ratios instead lets a very high return on capital swamp any earnings yield, and the list turns into a return-on-capital list; adding ranks gives cheapness and quality equal say.
Value = weighted mean of the applicable Value models (Greenblatt 30%); composite weight of Value: 10%; Timing = min(Value, Momentum): 15%Current top stocks by Greenblatt
The Greenblatt-Style Magic Formula model is evaluated for every stock in our coverage it applies to. You can filter the full rankings table to see which stocks currently score highest on this model and compare them across all five investment frameworks.
Frequently Asked Questions
What is the Magic Formula in stock investing?
A ranking from Joel Greenblatt's The Little Book That Beats the Market (2006): rank companies by earnings yield (EBIT / enterprise value) and by return on capital (EBIT / (net working capital + net fixed assets)), add the two ranks, and buy from the top of the combined list.
How does the Greenblatt score rank stocks on AlphaStocks?
Every eligible company is ranked by earnings yield (highest = 1) and by return on capital (highest = 1); the two ranks are added and the list ordered by the sum, ties going to the higher earnings yield. The 0–10 score is 10 × the share of the eligible universe ranked below the company. Status bands: Strong — combined rank in the top 20%; Attractive — the next 20%; Neutral — the middle 30%; Reject — the bottom 30%.
Why does the Magic Formula use EBIT instead of net income?
EBIT (earnings before interest and taxes) is the same whether a business is financed with debt or equity and whatever its tax rate, so it compares the operations themselves. Enterprise value, not just market cap, is what those operations cost.
What is return on capital and why does it matter?
Return on capital = EBIT / (net working capital + net PP&E). It measures how much operating profit a business earns on the capital it needs to run. A business that earns a lot on little capital can grow without needing much new money.
Does the Magic Formula work for banks and financial companies?
No, and the model does not pretend otherwise. Greenblatt excluded financial and utility stocks: EBIT and working capital mean nothing for a balance sheet that is the business. AlphaStocks reports Greenblatt as not applicable for banks, insurers, asset managers, holding companys, utilitys, reits.
See all 1,500+ stocks scored
Every stock evaluated by Greenblatt-Style Magic Formula and four other investment models, from SEC filings. Changed in v23? See what changed and why.
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Model names reference the published investment methodologies of their respective authors. AlphaStocks is not affiliated with, endorsed by, or sponsored by Joel Greenblatt or any related entities. Our implementation follows the cited sources; where it adapts them, the adaptation is named above.
AlphaStocks provides investment research and analysis, not investment advice. Past performance does not guarantee future results. Always do your own due diligence before making investment decisions. Data sourced from SEC EDGAR and Alpaca Markets.