Greenblatt Rank — quality and cheapness together

Two rankings, added together

Greenblatt's argument is that the two things investors usually trade off can be demanded at once. He ranks every company twice:

• Return on capital = EBIT ÷ (net working capital + net fixed assets). How much operating profit the business produces per dollar genuinely tied up in it.
• Earnings yield = EBIT ÷ enterprise value. What you get back per dollar of the whole business, debt included.

Each company gets a rank on each measure; the ranks are summed; the lowest combined total wins. A company ranked 1st on quality and 250th on cheapness scores 251 — the same as one ranked 250th and 1st. Neither extreme wins on its own.

Why EBIT and enterprise value

Both formulas deliberately step above the capital structure. Net income and P/E are affected by how a company is financed and taxed; EBIT over enterprise value compares two businesses as if you were buying them outright and could refinance afterwards. That makes a leveraged and an unleveraged company comparable, which is the whole point of a ranking.

What it does not handle

Greenblatt's own universe excluded financials and utilities, and the exclusion is not fussiness: for a bank, debt is raw material rather than financing, so "enterprise value" and "capital employed" do not mean what they mean elsewhere.

The strategy also has long stretches of underperformance — Greenblatt is explicit that it fails often enough, and for long enough, that most people abandon it before it works. A rank is a starting list, not a verdict.

Pythia calls this Greenblatt Rank after its author. The name it was published under is a registered mark held by others, so we cite the book and use the author's name for the feature.