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.