Classic investor frameworks · Screening and validation
Joel Greenblatt · Magic Formula
Ranks stocks by earnings yield and return on capital to find companies that are both inexpensive and capital-efficient.
- Guide level
- Practical
- Output
- Screening and validation
Core formula
Rank by earnings yield and return on capital, then combine the two ranksHow to interpret it
Ranks stocks by earnings yield and return on capital to find companies that are both inexpensive and capital-efficient.
The output should be read as a scenario or decision aid, not as a guaranteed price target. Compare it with at least one method based on different economic assumptions.
Practical workflow
- Normalize the latest public financial and operating data.
- Choose assumptions that match the company's economics and accounting structure.
- Calculate conservative, base and optimistic cases where the method permits.
- Compare the result with market pricing and an independent valuation method.
- Document the assumptions that drive the largest changes in value.
Key limitation
It is a portfolio screen rather than a standalone fair-value model and needs consistent data definitions.
How Stockinsky uses it
Stockinsky uses this framework only when the company type and available data support it. Professional valuations expose assumptions, sources and warnings instead of presenting false precision.