by
Mubashar Majeed , Lecturer , School of Advance business and commerce (SABAC)
The "magic formula investing" method ranks stocks by two main criteria:earnings yield : EBIT / enterprise value.return on capital : EBIT / (net fixed assets + working capital).It excludes utilities, financial stocks, stocks below certain market cap thresholds, and foreign companies.The main flaws I see with this are:If profit margins are elevated for cyclical reasons, a stock will appear cheap by this metric.A stock's growth rate is not factored into this metric. Thus companies that are growing fast will appear expensive by this metric, and companies whose financial results are in decline will appear cheap.It excludes sectors and stocks that may be attractive.
