Quality Ratio

View Financial Glossary Index

Definition

The Quality Ratio (not to be confused with Earnings Quality) is a quantitative factor that determines how efficiently companies use their assets to generate high gross margin sales. Recently, modern finance has been looking to the Quality Ratio as a 5th key "Factor" that explains long-term equity investment returns.*

Companies with high quality ratios tend to have a large amount of gross profits to pay for marketing and R&D costs. They are theoretically well positioned to invest in their own futures.

* The other four factors are the Market Factor, Size (Market Cap), Value, and Momentum.

Formula

Quality Ratio = (Sales - Cost of Goods Sold) / Total Assets = Gross Profits / Total Assets

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