Gross Profitability

Gross profit divided by total assets — a quality signal that often predicts returns better than earnings-based ratios.

Part of the Profitability & Quality course · Lesson 12 of 19

Formula

Gross profitability = (Revenue - Cost of goods sold) / Total assets

What it is

Gross profitability is gross profit (revenue minus cost of goods sold) divided by total assets. It was popularized by researcher Robert Novy-Marx, who showed it is a strong, clean measure of business quality. Because gross profit sits high on the income statement, it is harder to distort than net income.

Why it matters

Profitable firms with strong gross profitability have historically delivered better long-run stock returns, making it a useful quality factor. It captures real economic productivity before management's discretionary choices on overhead, depreciation, and taxes muddy the picture. It pairs well with value metrics to find cheap, high-quality companies.

How it's calculated

Divide gross profit (revenue minus cost of goods sold) by total assets for the same period.

How Quintarthai uses it

Revenue, cost of goods sold, and total assets needed to compute gross profitability are on the Financials tab of a company deep-analysis page; the Stock Screener can help narrow the field with AI Smart Search.

Cross-border note. The inputs are reported the same way under both US GAAP and IFRS, so gross profitability is directly comparable across US and Canadian companies once converted to a common currency.

FAQ

Why use gross profit instead of net income?

Gross profit is closer to the top of the income statement, so it is less affected by accounting choices on overhead, interest, taxes, and one-off items. That makes it a cleaner, harder-to-game measure of underlying profitability.

Why divide by total assets and not equity?

Dividing by total assets measures how much gross profit the whole asset base generates, regardless of how it is financed. This keeps the ratio comparable across firms with different debt levels.

See Gross Profitability on a real company

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