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Profitability Regresses Toward the Mean


 

  • We analyzed on average 11,000 companies in 10 sectors to understand how ROIC for a company changes over time
  • We hypothesized that it is almost impossible for a firm to maintain a high level of profitability forever, neither to have losses forever
  • The results show that very profitable firms decrease in profitability and low profitability firms increase in profitability
  • Over a decade we can’t see a complete mean reversion but the profitability regresses toward the mean
  • In other words, Stars tend to remain Stars and Dogs tend to stay Dogs

 


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