THE PERSISTENCE OF CORPORATE PROFITABILITY

An intuitive approach for testing persistence in corporate profitability is to examine the transition rates of firms moving from one performance category to another over some time interval. Return on capital and its persistence vary by industry. Fade is a powerful and intuitive way to understand if a firm possesses a competitive advantage and for how long it is likely to persist. As persistence rises, the fade rate decreases, which extends a firm's period of competitive advantage. If firms do not move between quartiles, then persistence is high: Companies that make money will continue to make money. Conversely, if firms frequently change quartiles, then persistence is low: Companies that make money, as well as companies that don't, will become average performers with age. The high rate of persistence for Food, Beverage, and Tobacco (FBT) companies hints at strong barriers to entry that keep new competitors out and existing competitors locked in place.