Twenty years of profitability research is one long subtraction. It stopped one line early.
Gross profits, minus SG&A, minus operating accruals — each step in the profitability literature is a published anomaly, and each one improved on the last. Vyas takes the next subtraction, capital expenditures, and arrives at the quantity Buffett described in 1986 as owner’s earnings.
The mechanism is mechanical and clean. Capex predicts nothing on its own; it earns its place by removing a nuisance exposure, driving the metric’s correlation with capex from 0.345 to 0.030 while leaving the cash-profitability exposure intact. The resulting measure subsumes a range of value and profitability anomalies on every deflator tested, and the headline strategy refuses to pick one — it sums ranks across market equity, total assets and book equity, which has no tunable parameters and subsumes all three of its own inputs.
The paper is a preprint whose author flags a suspected flaw in his own data pipeline and ships the replication code. That makes it more trustworthy than one that does not, and simultaneously means the headline numbers should be re-derived before being quoted.
Source paper
Vyas, A. (2024). Owner’s Earnings, Cash-based Operating Profits, and Capital Expenditures in the Cross Section of Stock Returns. Working paper — Department of Economics, Rice University, 12 April 2024.
SSRN 4794183 · DOI 10.2139/ssrn.4794183
Personal reading note. Written while studying the paper — not peer reviewed, not a replication, and not a substitute for the source. Every claim above belongs to the authors; any error in restating it is mine. Follow the link.