Novy-Marx · Gross profitability factor
Divides gross profit by total assets to gauge profitability quality; the ratio has historically correlated positively with future returns and hedges cheap stocks against being value traps.
- Guide level
- Practical
- Output
- Screening and validation
Core formula
Gross profitability = gross profit / total assetsHow to interpret it
Divides gross profit by total assets to gauge profitability quality; the ratio has historically correlated positively with future returns and hedges cheap stocks against being value traps.
The output should be read as a scenario or decision aid, not as a guaranteed price target. Compare it with at least one method based on different economic assumptions.
Practical workflow
- Normalize the latest public financial and operating data.
- Choose assumptions that match the company's economics and accounting structure.
- Calculate conservative, base and optimistic cases where the method permits.
- Compare the result with market pricing and an independent valuation method.
- Document the assumptions that drive the largest changes in value.
Key limitation
Not applicable to financials; gross-margin structure varies too much across industries for cross-industry comparison; a single factor, not a complete stock pick.
How Stockinsky uses it
Stockinsky uses this framework only when the company type and available data support it. Professional valuations expose assumptions, sources and warnings instead of presenting false precision.