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Strategies & Market Trends : Greenblatt's Little Book That Beats The Market
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From: Shane M2/6/2006 2:00:04 AM
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Hi all, just read the book. I posted on the Buffetology thread before I realized this thread was here. Seems alot of folks are having trouble understanding exactly how (why?) Grennblatt uses a particular return on capital calc.

Message 22136284

appreciate any comments on this (from the post above):

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 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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