THE RELATIONSHIP BETWEEN GROSS PROFIT, OPERATING PROFIT AND NET INCOME AND FUTURE RETURNS IN BRAZIL

Abstract

Objective: The objective of this study was to verify which of the profit definitions (gross profit, operating profit or net profit) performs better in explaining the future behavior of returns in the Brazilian market, and whether these results are maintained when forming portfolios combining profitability, book-to-market indexes and BrF_Score.

Method: To this end, the Fama and MacBeth two-stage regressions, Hotelling's T2 test and Fama and French's three-factor model are used, in addition to the analysis of the excess returns of the portfolios built. The periodicity of the study is monthly, covering the period from January 2010 to June 2019, totaling 15,577 observations from 200 firms.

Results: The results show that net income and operating income produce the profitability metrics with the greatest explanatory powers for one-month forward returns, and also produce the portfolios with the highest excess returns compared to profitability metrics based on gross profit.

Contributions: Therefore, the contribution of the paper was to demonstrate that net income explains future returns better in the Brazilian market, while in the American market, there is evidence that gross profit plays this role, and these differences are due to the different macroeconomic influences suffered by such markets.