Return On Capital (ROC) measures a company's efficiency at allocating the capital under its control to profitable investments. The ROC measure gives a sense of how well a company is using its money to generate returns. Comparing a company's ROC with its cost of capital (WACC) reveals whether invested capital was used effectively.
We calculate the ROC as defined in Joel Greenblatt's little book that beats the market. Instead of comparing EBIT to total assets, we compare it to the cost of the assets used to produce those earnings (tangible capital employed).
Click on the links below to navigate to the components of this formula:
- Operating Income, i.e. EBIT.
- Net Working Capital: the capital a business needs to fund its receivables and inventory.
- Net Fixed Assets: the capital needed to fund the purchase of fixed assets necessary to conduct its business.
In our screens:
Greenblatt Magic FormulaJoel Greenblatt introduced the magic formula in 2005, in his bestseller 'The little book that beats the market'.How does it work?. more...
In our scorecard manual:
Quality FactorsThe next grid in the scorecard shows the same information for the key quality factors.. more...
In our blog:
Greenblatt Magic Formula Improved!We're proud to announce a significant improvement to our magic formula.. more...