Magic Formula

# Magic Formula — scoring rules

Source: Joel Greenblatt, *The Little Book That Beats the Market* (2005) and *The Little Book That Still Beats the Market* (2010).

1. Earnings yield = EBIT / Enterprise value. EBIT is trailing twelve months: latest annual OperatingIncomeLoss plus the quarters reported after that fiscal year end minus the same quarters a year earlier (SEC quarterly frames). When no quarter has been reported since the latest fiscal year and that year ended at most 135 days ago (the next 10-Q is not yet due), the annual figure is the trailing twelve months. If the quarterly chain is otherwise incomplete the company is not ranked (`insufficient data (quarterly EBIT chain incomplete)`); its latest annual EBIT is shown as a separate, non-comparable figure. EV = market cap + total borrowings - cash. Total borrowings reconciles overlapping tags: LongTermDebt (which already includes current maturities) + ShortTermBorrowings; otherwise LongTermDebtNoncurrent + DebtCurrent (or + LongTermDebtCurrent + ShortTermBorrowings). With no debt tag in the last 18 months, or only current-debt tags (the long-term part may sit under a tag not read, e.g. LongTermNotesPayable), the company is `insufficient data (debt unknown)`; zero is never assumed.
2. Return on capital = EBIT / (net working capital + net fixed assets), where NWC = AssetsCurrent - LiabilitiesCurrent exactly as reported (it may be negative) and net fixed assets = PropertyPlantAndEquipmentNet. If NWC + PP&E is not positive the company is not ranked and the reason is shown.
3. Rank every eligible company on each measure (1 = best), add the two ranks, and convert to a percentile.
4. Score = 100 x (1 - combined-rank percentile). 100 = best in the universe.

Excluded, as Greenblatt excludes them: financials (SIC 60, 61, 63, 64 and 67 (banks, credit, insurers, REITs and holding companies); SIC 62 (brokers, exchanges, asset managers) is scored, so GS, MS and SCHW carry scores and should be read with that in mind) and utilities (SIC 49). Companies with EV <= 0 or capital <= 0 are not scored.

Market cap = the stock page's market value: last close / depositary ratio x the latest point-in-time SEC share count (cover page, summed across equivalent classes), restated for issuer-verified splits after the count date; withheld (not ranked) when the share basis is unresolved. The annual EBIT base and the prior-year comparative quarters are history inputs: they do not set data_as_of or the stale flags.

Required fresh inputs (within 18 months): current assets, current liabilities, cash, PP&E, a debt tag, share count, price. Otherwise the company is `insufficient data (<reason>)`. Custom or alternative tags are not interpreted; absence is treated as unknown, not zero.