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Strategies & Market Trends : Buffettology

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To: Shane M who wrote (3744)	2/6/2006 1:01:42 AM
From: Shane M	Read Replies (1) of 4691

All, has anyone read the Joel Greenblatt book "The little book that beats the market?" It seems it would appeal to folks on this board. I'm building some calcs into my stock database and was confused by the calculation of Return on Capital Greenblatt uses. He calculates a return on capital as ROC = EBIT / (Working Capital + Net Fixed Assets) where ROC is Return on Capital EBIT is Income before Interest and Taxes (Gross Operating Income) Working Capital is Current Assets less Current Liabilities Net Fixed Asset is Property/Plant and Equipment less depreciation. Together he calls Working capital + fixed assets "tangible assets" ... at least that's the way I've interpreted what he's saying. Does it make sense that long term assets / liabilities would be excluded from a calculation like this? There are many companies with where the denominator in the above calculation is much smaller than EBIT creating astronomical returns on working capital. If anyone has read this book or has an opinion on this calculation for return on working capital comments are appreciated.

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