Composite Factors
The ERP5 rank is a screen designed by MFIE Capital that uses the following ratios to identify good companies that are trading at undervalued prices:
- Return on Invested Capital (ROIC) - EBIT / (Net Working Capital + Net Fixed Assets).
- Earning Yield - EBIT / Enterprise Value.
- Price-to-Book Value - Market Capitalization / Book Value.
- 5Y Trailing ROIC - five year average EBIT / (Net Working Capital + Net Fixed Assets).
The results show that the ERP5 rank is a factor that works very well when applied to small cap companies, with the second best results of all single factors we tested. Q1 results are substantially better than Q5. However, the results for small cap companies are not completely linear.
What is worth noting is that the Q1 results for the ERP5 for all size companies are higher than that of the MF rank. The ERP5 screen is particularly effective in identifying market beating small companies. It is also a very consistent factor, beating the market 83% of the time for small and medium-size companies, and 67% of the time for large companies.