Market pundits come in all shapes and sizes and tout a wide range of strategies for analyzing stocks. In his bestselling 2005 book, The Little Book That Beats the Market, market guru Joel Greenblatt showed readers how to identify good companies selling for bargain prices using a "Magic Formula" of only two criteria--return-on-capital and earnings yield. It is calculated by dividing earnings before interest and taxes (EBIT) by the sum of fixed assets and working capital. Greenblatt believes that ROC allows an investor to see how a company best uses it assets to generate earnings. Earnings Yield: Greenblatt uses earnings before interest and taxes (EBIT) in this formula and divides by total “enterprise value,” defined as market value plus interest-bearing debt (to determine how much debt is used to generate earnings):Earnings before interest and taxes (EBIT) + (market value of stock plus debt)

Source: Forbes October 03, 2017 16:18 UTC