economic profitability. An alternative explanation lies in the measure's deflator. We find that net income equals gross profit …Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013 …) concludes that it outperforms other measures of profitability such as bottom-line net income, cash flows, and dividends. One …

Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit … returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that … excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability …