In a horse race between these three measures of productivity, gross profits to assets is the clear winner – Novy-MarxHis argument is compelling for the following reasons. Firstly, using Gross Profits instead of Earnings. Gross Profits is the cleanest accounting measure. If we think about it, as we go further down the income statement, the more ‘polluted’ profitability measures become. Say if a firm generates higher revenue and has a lower cost of production compared to their competitors, they are unambiguously more profitable. Despite that, the firm ......
Recently, I was reading an equity research write-up that prompted me to research further into a financial measure called ‘Gross Profitability’, measured by Gross Profits divided by Total Assets (GP/TA). In the research paper written by Noxy-Marx in 2010, he discusses that GP/TA ratio is actually a better predictor of future returns than more widely used earnings- and cashflow- based valuation metrics.