Quality factors: fix a profitability definition before comparing firms

Quality can refer to profitability, stability or financial safety. This article chooses one narrow characteristic: earnings divided by average shareholders’ equity. It is not a complete quality score.

Specify the numerator, denominator, accounting period and direction. A simple profitability ratio is not identical to a published composite quality factor.

EX-A earns 1.2 billion yen on average shareholders’ equity of 10 billion. EX-B earns 0.6 billion on average shareholders’ equity of 8 billion. Their return-on-equity measures are 12% and 7.5%. The numbers are fictional.

With the same earnings and shareholders’ equity of 6 billion, A’s ratio would become 20%. A smaller denominator can raise the ratio without higher earnings.

Decide whether earnings include one-off gains, and whether the accounts are consolidated. Fix how average shareholders’ equity is measured. Match releases to the historical decision time.

Very small or negative shareholders’ equity can produce extreme or unusable ratios. Predefine exclusions or clipping, rather than changing them after seeing returns.

A profitable firm can be expensive. A cheap firm need not be profitable. Before combining the characteristics, inspect their distributions, correlations and sector concentrations.

Compare results across periods and samples. A historical relationship does not establish future excess returns; trading costs and execution remain separate questions.

KabuForge’s public factor course uses price-derived features. It does not establish automatic accounting-data acquisition or a built-in quality strategy. Confirm the input path and publication history before designing this study.

Separate features from future-return labels. Related concepts are coverage, factor correlation and point-in-time data.

Concept references: original research on multiple dimensions of quality. Additional reference: the distinct operating-profitability factor definition. Software workflow and limitations: KabuForge public GUI research course. Reviewed October 6, 2026. The fictional examples are teaching calculations, not course execution results.

The public course is research-only and does not certify historical information availability. A concept explanation does not establish that every method is implemented in the software. This article recommends no securities, trades or settings. Read the disclaimer.

Explore the strategy concepts learning path

• Size factors: distinguish market capitalization from a return spread
• Low volatility: measure historical variation without promising safety
• Multifactor research: check scale and overlap before combining scores