A stock valuation strategy identifying potentially undervalued companies by combining Enterprise Value to EBIT ratio, Return on Capital, and Earnings Yield into a single scoring method.
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The Magic Formula strategy calculates a composite score by ranking stocks based on Enterprise Value/EBIT (EV/EBIT) and Return on Capital (ROC). It combines these metrics with Earnings Yield to create a comprehensive valuation assessment that helps identify potentially undervalued companies.
The indicator generates a multi-line chart displaying EV/EBIT, combined ROC and Earnings Yield, an MF Score, and a 50-period Exponential Moving Average of the MF Score. Traders analyze these lines to understand a stock's historical valuation trends and potential undervaluation.
Why it may be useful
This approach provides a systematic method for identifying potentially undervalued stocks by moving beyond simple price metrics and incorporating fundamental financial performance indicators. It offers a more comprehensive view of a company's intrinsic value by considering multiple financial dimensions simultaneously.
By combining different financial ratios, the strategy helps investors make more informed decisions, reducing emotional bias and providing a structured framework for stock selection. It enables comparison of a company's current valuation against its historical performance, offering deeper insights into potential investment opportunities.
When to explore it
The Magic Formula strategy is most effective for long-term investors and swing traders seeking fundamentally sound, potentially undervalued stocks. It works best when applied to companies with stable financial performance and clear historical data for comprehensive analysis.
Investors should use this method as part of a broader research strategy, combining it with other fundamental and technical analysis tools. It is particularly useful during market corrections or when seeking value investments across different sectors and market capitalizations.
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What we’ve verified
Access, alerts and repainting behaviour have not been independently verified for this indicator. Check the creator’s current publication and settings.
General descriptions and classifications are recovered research. Verified details above identify the specific checks we have completed. Check the creator’s current publication for later changes.
