Hands-On Machine Learning for Algorithmic Trading

Key metrics

Quality factors rely on metrics computed from the balance sheet and income statement that indicate profitability reflected in high profit or cash flow margins, operating efficiency, financial strength, and competitiveness more broadly because it implies the ability to sustain a profitability position over time.

Hence, quality has been measured using gross profitability (which has been recently added to the Fama—French factor model, see Chapter 7, Linear Models), return on invested capital, low earnings volatility, or a combination of various profitability, earnings quality, and leverage metrics, with some options listed in the following table.

Earnings management is mainly exercised by manipulating accruals. Hence, the size of ...