Gross Profit (TTM)

What is Gross Profit (TTM)?

Gross profit is what remains after a company pays the direct, variable costs of producing the goods and services it sold. On the income statement, it is the second line: revenue minus cost of goods sold (COGS). What goes into that COGS number depends on the business. For a manufacturer, COGS includes raw materials, factory wages, and the depreciation of production equipment. For a retailer, it is the wholesale cost of inventory plus inbound freight and distribution. For a software company, COGS often means the cost of hosting, customer support tied to active accounts, and the salaries of engineers maintaining the product. Anything that scales directly with the volume of what is sold belongs in COGS, while corporate overhead, sales and marketing, research and development, and general administrative costs sit below the gross profit line in operating expenses.

Gross profit is the cleanest indicator of pricing power and product differentiation a company has. A business that can charge meaningfully more than what its competitors charge, or produce the same thing at a structurally lower cost, will show that advantage on this line before it shows up anywhere else. Software companies often run gross profit at 70 to 85 percent of revenue. Branded consumer goods land between 35 and 60. Mass-market retail tends to sit in the 20 to 40 percent zone. Pure commodity businesses, where one producer's output is indistinguishable from another's, often struggle to keep gross profit above 15 percent of revenue.

The trailing twelve months convention sums the four most recently reported quarterly figures, smoothing seasonality the same way it does for revenue.

Formula

The arithmetic is simple, but the inputs are not always consistent across companies. Two firms in the same industry can classify identical costs differently: one might put customer-support salaries in COGS while a competitor puts them in operating expenses, which makes the second look more profitable on the gross-profit line. The fix is to compare gross profit alongside the next line down (operating expenses) and the metric that combines them (operating income). If a company has unusually high gross profit but unusually high operating costs versus peers, the classification may be the explanation rather than the underlying economics.

How to Interpret Gross Profit (TTM)

Gross profit is most useful when viewed as a percentage of revenue (the gross margin) and when tracked over time. A rising gross margin while revenue is also growing is the signature of a business with widening competitive advantage: it is selling more without giving up unit economics. A falling gross margin during a period of revenue growth is the warning every investor should respect; it usually means competition is biting, input costs are running ahead of pricing, or the product mix is shifting toward lower-quality business.

The metric breaks down in a few well-known places. Banks and insurance companies do not report COGS in any meaningful sense, so gross profit is not a useful concept there. REITs and other real-estate-focused businesses have their own version of operating income that better reflects their economics. Heavy-industrial and energy companies have very lumpy gross profit because commodity prices swing through the year, so single-period numbers can mislead; the TTM smoothing helps but does not fully solve the problem.

Why Gross Profit (TTM) Matters for Investors

Robert Novy-Marx's 2013 paper "The Other Side of Value: The Gross Profitability Premium" is one of the most cited findings in modern factor investing. Novy-Marx showed that gross profit scaled by total assets, a measure of how efficiently a company converts its asset base into pre-overhead profit, was as strong a predictor of forward equity returns as the classic book-to-market value factor, and that combining the two strategies produced markedly higher returns with lower drawdowns than either on its own. The intuition is that gross profit sits closer to the true economic earning power of a business than net income does. By the time profitability passes through depreciation, amortization, taxes, interest, restructuring charges, and one-time items, much of the signal is gone. Gross profit catches the economics before the accounting eats them.

Using Gross Profit (TTM) in Stock Screening

The Novy-Marx ratio (gross profit divided by total assets) is the canonical screen. A common implementation takes the top quintile across the US-listed universe, then layers in a value or quality filter. A simpler version uses gross margin alone, requiring it above the sector median and stable or rising over a multi-year window. Quality-growth screens combine gross margin above 50 percent with revenue growth above 15 percent, isolating businesses with both expansion and durable unit economics, the profile of category leaders in software, branded consumer goods, and specialty industrials. For value investors, a contrarian screen flips the logic and looks for high gross margin paired with a depressed P/S, finding businesses whose underlying economics are strong but whose market price has detached, often during temporary issues that look existential at the time but turn out not to be.

Backtesting with Gross Profit (TTM)

The Novy-Marx gross-profitability factor has held up reasonably well out of sample since the original publication, though the magnitude of the premium has compressed somewhat as the strategy became more widely known. Long-horizon backtests show the gross-profitability premium working best when combined with valuation, with the strongest returns concentrated in companies that are both highly profitable on a gross basis and reasonably priced. Point-in-time data integrity matters here because COGS classifications can be restated in later filings as auditors push companies to reclassify costs; using the as-reported number rather than the latest revision is the only honest way to test how the signal would have worked in real time. A backtester that uses cleaned, latest-known COGS values on dates before those values were public will systematically overstate the returns of every gross-profitability strategy it tests. SledgeKey anchors each historical observation to the date the filing was actually released, restatements and all.

Related Metrics