Serious concern on the selection process of a smallcase

Hi @Anugrah here is a serious concern I am having with your selection procedure for the smallcase “Magic Formula”. As there is a stock (there may be many) named “Graphite India” which I, in my honest opinion does not pass the selection criteria for the inclusion in the smallcase(magic formula). My concern increased more while I was chatting with your customer care, as she told me the criteria to shortlist the stocks for magic formula is “Shortlist companies with the lowest earnings yield and highest return on capital, earnings yield is calculated as earnings before interest & tax divided by enterprise value”, now my concern is why you people shortlist on the basis of lowest earnings yield? Isn’t it breach of contract with your customers. Please look into this matter seriously. Now I am feeling I have been duped,:frowning_face:

Hi, I think there is some mistake/typo by our support in communicating the criteria. Magic Formula smallcase selects stocks on the basis of high earnings yield and high Return on capital. In addition to this we also check for many more criteria like how much of the promoter holding is pledged, liquidity etc. If the stock qualifies everything, then only it comes in a smallcase. Please be assured about the criteria used. Also, if you would like we can share details about each and every stock in the smallcase over email. Please let me know

Hi @Anugrah thanks for the clarification, if possible do share the details about the stocks of that particular smallcase(magic formula).As am a big fan of Joel Greenblatt and his way of investing so I myself do screen on the basis of his investing style. This reply shows the kind of transparency you people are having, kudos to that.

@Anugrah, sir I am waiting for your details about each and every stock in the smallcase. email: [email protected]

Hey, my team told me that you had doubts regarding RoCE number for Graphite India, because Magic Formula smallcase selects for high ROCE and high EY. Historically the RoCE number has been low for the company, but this year it has increased significantly and that is why it came up in the smallcase. ROCE of Graphite India in FY2018 is 49.21%. smallcase calculates ROCE as Earnings Before int, taxes and depreciation (EBIT) / (Total assets - Current liabilities).

Graphite India’s numbers for FY2018 are as below:
EBIT : Rs.1392.53 crore*
Total assets : Rs.3780.29 crore
Current liabilities: Rs.616.11 crore

*EBIT = Net sales - (Cost of Materials Consumed+Purchases of Stock in Trade+Changes in inventories of finished goods, Work in Progress and Stock in Trade+Power and fuel+Consumption of Store & Spare Parts+Excise Duty+Employee benefits expenses+Depreciation and amortisation expenses+Other Expenses)

The numbers mentioned above can be accessed here:

Please let me know, if you still want to know the numbers for all the other stocks in the same smallcase and we will send them to you right away

Thanks @Anugrah, thats cleared lots of air from my mind. Yes I confessed I used the old data to come up with lower ROCE. Thanks for the latest data. No need to cross check all stocks but I want to know what’s the minimum parameter you consider for the earnings yield? Ideally I prefer min 15% and ROCE as 25%( I can relax in this parameter if I found the company has great growth potential).