The Other Side of Value: The Gross Profitability Premium

The gross profit ratio tends to favor growth firms but is not identical to identifying growth firms on the basis of standard metrics. The author examines using a ratio of gross profit (revenue less cost of goods sold) to assets as a means of creating and enhancing long–short portfolio strategies. He finds that the gross profit long–short strategy (long very profitable firms and short less profitable firms) hedges value strategies effectively and enhances a number of other strategies as well.