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Strategies & Market Trends : Greenblatt's Little Book That Beats The Market -- Ignore unavailable to you. Want to Upgrade?

To: Shane M who wrote (78)	2/18/2006 7:00:48 PM
From: Dave	Respond to of 218

Working capital (except current portfon of LT Debt) + net PP&E should closely approximate Debt plus S.E.

To: Shane M who wrote (78)	2/19/2006 1:06:37 PM
From: Stewart Whitman	Read Replies (1) \| Respond to of 218

Why working capital (curr asset less curr liab) and net fixed asset (prop plant equip less deprec.) should comprise the denominator of an ROC calc to the exclusion of other measures is still a ? to me. I've strongly favored a return on total capital calc that includes equity and long term debt in denominator and just have a tough time understanding the advantages of ROC as measured. I suspect that excluding lt debt in the ROC calc has a lot to do with the idea of having one ranking for how "good" a business is and another for how "cheap" it is. After all, whether a particular business is carrying a lot of debt or not does not really reflect whether or not the underlying business is a good generator of cash. Greenblatt's ROC calc tries to measure the "goodness" of a stock. His earnings yield calc measures the "cheapness" of the stock and that is affected by debt level. The other reason for excluding lt debt, is that once you start using it, you really should include interest expense in the earnings in the numerator, and then once you start including that interest expense, you should also consider tax rates and perhaps use after tax income because of tax advantages of the leverage. It all gets rather difficult to see the underlying business. Of course, there are arguments for using lt debt in a ROC. When you do that, I think that you are measuring how well management is using the capital available to it, instead of measuring how good the underlying business is. Regards, Stew