Profitability, measured by gross profits-to-property, has roughly the identical energy as e-book-to-market predicting the cross section of average returns. Profitable corporations generate significantly higher returns than unprofitable firms, regardless of having significantly increased valuation ratios. Controlling for profitability also dramatically increases the performance of value strategies, especially among the many largest, most liquid stocks. These results are difficult to reconcile with well-liked explanations of the value premium, as profitable firms are less liable to misery, have longer cash stream durations, and have lower ranges of operating leverage. Controlling for gross profitability explains most earnings related anomalies and a wide range of seemingly unrelated worthwhile trading strategies.
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