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Strategies & Market Trends : Greenblatt's Little Book That Beats The Market
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To: Stewart Whitman who wrote (56)2/1/2006 5:09:19 PM
From: bruwin  Read Replies (1) of 218
 
Fair enough. I took it as the combination of BOTH net working cap. + net fixed assets that were set to Zero.

You say that for the Return on Capital ranking, Greenblatt uses 'net working capital' + 'net fixed assets' as the denominator, and not the fields I mentioned.

Well ... I'd like to suggest that the fields I mentioned, viz. (Share Capital + Reserves) + Long term Debt + Deferred Tax = Fixed Assets + Current Assets - Current Liabilities.
Which is the same as saying :-
Capital Employed = Employment of Capital.
And like any mathematical equation, the left hand side must always equal the right hand side, which is what the Balance Sheet is all about.
In addition, "Current Assets - Current Liabilities + Fixed Assets" is the same as "Net Working Capital + Net Fixed Assets".
Therefore I believe the Value of Greenblatt's "Return on Capital" will be exactly the same as mine.

If one sets "Net Working Capital" to Zero then the only 'Employment of Capital' will be contained within the Fixed Assets of the company.

Of course, the above is the original form of the Balance Sheet equation. The USA, and my country as well, uses ...
(Share Capital + Reserves) + Long term Debt + Deferred Tax + Current Liabilities = Fixed Assets + Current Assets.
The United Kingdom, for example, still uses the original Balance Sheet format with Current Liabilities forming part of 'Employment of Capital'.
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