The Other Side of Value: The Gross Profitability Premium


Robert Novy-Marx, Ph.D.

Profitability, measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross-section of average returns. Profitable firms typically generate significantly higher returns than unprofitable firms, despite having significantly higher valuation ratios. Controlling for profitability tends to also dramatically increase the performance of value strategies, especially among the largest, most liquid stocks. These results are difficult to reconcile with popular explanations of the value premium, as profitable firms are generally less prone to distress, have longer cash flow durations, and have lower levels of operating leverage. Controlling for gross profitability explains most earnings related anomalies, and a wide range of seemingly unrelated profitable trading strategies.


  • The information contained herein is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.