This paper presents an empirical analysis of the persistence and predictive ability of the components the profitability ratio, namely, margin and turnover. Based on a large sample of Spanish companies, we document that the persistence of turnover is greater than that of profit margin and that abnormal components of both, turnover and margin have a lower degree of persistence when compared to industry components. As for predictive ability, our findings confirm that albeit having a lower persistence, margin has a greater predictive power than turnover. By decomposing margin and turnover into their industry and abnormal components, we confirm that abnormal items have a greater predictive ability than industry components. Additional tests revealed that our findings are robust, although the predictive power of our variables changes depending on their sign as well as in the presence of positive and negative earnings.
Monterrey, J., & Sánchez-Segura, A. (2011). Persistencia y capacidad predictiva de márgenes y rotaciones. Un análisis empírico. Revista de Contabilidad, 14(1), 121–153. https://doi.org/10.1016/S1138-4891(11)70024-3