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Metric · Profitability

Return on Capital (ROC) per Greenblatt Explained

Q: What counts as a good ROC value?

Under Greenblatt's tiers, 40% and above counts as near-monopoly returns, 25–40% as excellent, and 15–25% as solid. Below 5%, or negative, signals value destruction.

Q: Why is goodwill excluded from ROC?

Because goodwill comes from acquisitions and says nothing about the operating efficiency of the underlying business. Without stripping it out, an expensive acquisition would artificially depress ROC even though the actual business hasn't changed.

Q: How does ROC differ from ROE and ROCE?

ROE relates profit to equity and can be leveraged with debt. ROCE uses total capital employed, including goodwill. Greenblatt's ROC deliberately excludes goodwill and intangibles to isolate pure operating capital efficiency.

Q: Why doesn't ROC work well for banks and utilities?

Their balance sheets are structured differently: banks run on customer deposits rather than typical working capital, and utilities carry heavily regulated, long-lived fixed assets. The Magic Formula excludes both sectors for this reason.

Return on capital (ROC) as defined by Joel Greenblatt shows how much operating profit a company generates from the capital actually tied up in its day-to-day business. Unlike many profitability ratios, it deliberately strips out goodwill and other intangible assets.

Updated 20266 min read

Formula

ROC = EBIT ÷ (Net working capital + Net fixed assets) × 100

> 25%Outstanding return on capital

15–25%Solid return on capital

< 15%Weak return on capital

Guideline values, industry-dependent, illustrative

The formula in detail

The components of the formula at a glance.

Numerator

EBIT

Operating profit before interest and taxes, independent of financing structure and tax burden.

Denominator

Net working capital + net fixed assets

The tangible capital tied up in the operating business, excluding goodwill and intangible assets.

ROC calculator

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EBIT (€m)

Tangible capital employed (€m)

Result ROC

Outstanding return on capital

30.0 %

At 40% and above, ROC reaches what Greenblatt calls near-monopoly territory: a business with exceptional pricing power or capital efficiency.

Between 25% and 40%, a company earns an excellent return on capital, typical of brand or network businesses with light capital needs.

A ROC of 15% to 25% counts as solid and clears the cost of capital for most industries.

Below 5%, or in negative territory, the business is destroying value: it earns less on its capital than that capital could earn elsewhere.

Used in these strategies

Magic Formula: Value + QualityGood companies at cheap prices: two factors, one score.

Frequently asked questions

What counts as a good ROC value?

Under Greenblatt's tiers, 40% and above counts as near-monopoly returns, 25–40% as excellent, and 15–25% as solid. Below 5%, or negative, signals value destruction.

Why is goodwill excluded from ROC?

How does ROC differ from ROE and ROCE?

Why doesn't ROC work well for banks and utilities?

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Not investment advice. This explanation is for informational purposes only and does not constitute a recommendation to buy or sell securities.