Gross profitability = (Revenue - Cost of goods sold) / Total assets
Gross profitability (gross profit over assets) is a strong quality and return predictor.
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.
Check your understanding
Why did Robert Novy-Marx favor gross profit over net income when measuring business quality?
Gross profit is closer to the top of the income statement, so it is less affected by management's accounting choices on overhead, interest, taxes, and one-offs — a cleaner quality signal.