[Editor’s note: The original version of this article gave a wrong formula for the earnings yield. The wrong formula is this: Earnings yield = (Total enterprise value) / (Earnings before interest and taxes). The formula has been corrected within the article.]
Yesterday, I wrote and published an article titled The 30 Best Stocks In Singapore For 2018. The article is part of a real-time experiment I’m running to see if the Magic Formula investing strategy – which was developed by investor Joel Greenblatt and described in his book, The Little Book That Beats The Market – can work in Singapore over the long run.
In the article, I listed 30 Singapore stocks that had the best ratings according to the Magic Formula. The top five were:
1. Sinostar PEC Holdings Limited (SGX: C9Q)
2. Delong Holdings Limited (SGX: BQO)
3. Lung Kee Bermuda (SGX: L09)(SEHK: 255)
4. Capital World Ltd (SGX: 1D5)
5. Geo Energy Resources Ltd (SGX: RE4)
As a quick recap, the whole idea behind the Magic Formula is to pick the stocks with the highest quality (the ones with the highest returns on invested capital) at the lowest price (the ones with the highest earnings yield).
So, what the Magic Formula does is to ranks stocks according to their return on invested capital, with each stock given a score based on their rank. Then, all the stocks are ranked on their earnings yield and given a score. Both scores are then added up for each stock, and the 30 stocks with the best scores are then selected.
Here are the formulas I used to calculate the return on invested capital and earnings yield:
1. Return on invested capital = (Earnings before interest and taxes) / [(Net debt) + (Total equity)]
2. Earnings yield = (Earnings before interest and taxes) / (Total enterprise value)
After I published The 30 Best Stocks In Singapore For 2018, I received an excellent suggestion from a reader to share the data on the return on invested capital and earnings yield for the 30 stocks. So, here’s a table with the numbers:
Source: S&P Global Market Intelligence
Hopefully these numbers can be a useful starting point for your own research.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in OKP Holdings, China Sunsine Chemical Holdings, Valuetronics Holdings, Yangzijiang Shipbuilding (Holdings), Straco Corporation, and Boustead Singapore. The Motley Fool Singapore has a recommendation on AEM Holdings and Straco Corporation.