Magic Formula Calculator: Greenblatt Earnings Yield

Joel Greenblatt’s Magic Formula investing approach is built on a simple idea: buy good companies at good prices.

To do that, Greenblatt uses two core metrics. The first is Earnings Yield, which measures how cheap a company is relative to its enterprise value. The second is Return on Capital, which measures how efficiently the company turns invested capital into operating profit.

Full Tutorial: Greenblatt Earnings Yield Stocks Magic Formula + Calculator

Used together, these metrics help investors avoid a common mistake. A stock can look cheap because the business is weak, and a business can look excellent but still be too expensive. Greenblatt’s framework seeks to identify companies that are attractive on both dimensions simultaneously.

This Greenblatt Earnings Yield calculator helps you estimate both metrics quickly so you can assess whether a stock fits the basic logic of the Magic Formula approach.

How to Use the Greenblatt Calculator

Start by entering the company’s EBIT, or earnings before interest and taxes. This is the profit measure Greenblatt uses because it reflects operating earnings before financing decisions and taxes distort the result.

Next, enter:

• market capitalization
• total debt
• cash and cash equivalents

These are used to calculate enterprise value, which represents the effective cost to acquire the whole business.

Then enter:

• current assets
• current liabilities
• net fixed assets

These are used to estimate the capital employed in the business and calculate Return on Capital.

Once the values are entered, the calculator will show:

• enterprise value
• net working capital
• capital employed
• Greenblatt Earnings Yield
• Greenblatt ROC
• a combined screening verdict

The best way to use the result is as a screening tool. High-quality, attractively priced businesses deserve further research. Weak businesses or expensive businesses can usually be filtered out earlier.

Greenblatt Formula Explained

This calculator uses four core formulas.

First, enterprise value:

Enterprise Value = Market Cap + Total Debt – Cash

This adjusts equity value for debt and cash, so you are looking at the effective purchase price of the whole business.

Next, Earnings Yield:

Earnings Yield = EBIT / Enterprise Value

A higher earnings yield generally means the business is cheaper relative to its operating earnings.

Then, net working capital:

Net Working Capital = Current Assets – Current Liabilities

Finally, Greenblatt Return on Capital:

Return on Capital = EBIT / (Net Working Capital + Net Fixed Assets)

This measures how efficiently the company generates operating earnings from the capital required to run the business.

In plain English:

• Earnings Yield tells you how cheap the stock is
• ROC tells you how good the business is at turning capital into profits

Greenblatt Worked Example

Assume a company has:

• EBIT = $500,000
• Market Cap = $5,000,000
• Total Debt = $1,200,000
• Cash = $700,000
• Current Assets = $2,200,000
• Current Liabilities = $1,100,000
• Net Fixed Assets = $1,400,000

First, calculate enterprise value:

EV = 5,000,000 + 1,200,000 – 700,000 = 5,500,000

Next, calculate Earnings Yield:

Earnings Yield = 500,000 / 5,500,000 = 0.0909 = 9.09%

Now calculate net working capital:

Net Working Capital = 2,200,000 – 1,100,000 = 1,100,000

Then capital employed:

Capital Employed = 1,100,000 + 1,400,000 = 2,500,000

Finally, Return on Capital:

ROC = 500,000 / 2,500,000 = 0.20 = 20.00%

In this example, the business has:

• an Earnings Yield of 9.09%
• a Return on Capital of 20.00%

That suggests the stock may be reasonably attractive on price and fairly strong on business quality, though perhaps not elite on either measure.

How to Interpret the Result

The strongest Greenblatt candidates usually combine high Earnings Yield with high Return on Capital.

A high Earnings Yield means the business is cheap relative to enterprise value. This can be attractive, but only if the underlying business is sound.

A high ROC means the business is efficient and profitable relative to the capital it needs. That is often a sign of a stronger underlying business model.

The most attractive results are companies that score well on both:

• cheap enough to be interesting
• strong enough to deserve ownership

If Earnings Yield is high but ROC is weak, the stock may be cheap for a reason.
If ROC is excellent but Earnings Yield is low, the business may be high quality but overpriced.
If both are weak, the stock usually does not fit the Magic Formula logic well.

The best way to use this calculator is as an early-stage filter. A company that looks strong here should still be checked for debt risk, cyclicality, accounting quality, and competitive durability before making an investment decision.