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Find companies with high returns on capital from "summary" of The Little Book That Beats the Market by Joel Greenblatt
The secret to successful investing lies in finding companies that generate high returns on capital. This means identifying businesses that are able to generate more profit with the money they invest, ultimately leading to greater returns for shareholders. By focusing on companies with high returns on capital, investors can increase their chances of outperforming the market and achieving long-term success. To determine which companies have high returns on capital, one can look at a company's return on invested capital (ROIC). ROIC is a key metric that measures how effectively a company is able to generate profits from its investments. Companies with a high ROIC are able to generate more profit for each dollar of capital invested, making them attractive investment opportunities. In order to find companies with high returns on capital, investors can use a simple and effective strategy known as the Magic Formula. This strategy involves ranking companies based on two factors: return on capital and earnings yield. By focusing on companies with a high return on capital and a high earnings yield, investors can identify potentially lucrative investment opportunities. The Magic Formula is based on the idea that companies with high returns on capital and high earnings yields are undervalued by the market, presenting an opportunity for investors to capitalize on their potential for future growth. By investing in these companies, investors can potentially achieve above-average returns and outperform the market over the long term.- Finding companies with high returns on capital is a key strategy for successful investing. By focusing on companies with a high return on invested capital and using the Magic Formula to identify undervalued opportunities, investors can increase their chances of outperforming the market and achieving long-term success.
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