Leversens
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Quality score

A single composite z-score capturing three orthogonal dimensions of corporate quality.

The formula
Q = z( ⅓ Profitability + ⅓ Growth + ⅓ Safety )

Each pillar is itself a z-score of cross-sectional rank averages.

Profitability

Six ratios capturing how efficiently a firm generates profits relative to its asset base, equity, and revenue.

Ratio Formula Source
gpoa Gross Profit / Total Assets Novy-Marx (2013)
roe Net Income / Equity DuPont decomposition
roa Net Income / Total Assets DuPont decomposition
cfoa Operating Cash Flow / Assets QMJ paper
gmar Gross Profit / Revenue Margin quality
acc − (Net Income − OCF) / Assets Sloan (1996)

Growth

Five-year changes in profitability ratios. Captures dynamic quality—firms whose returns are improving.

Ratio Formula Source
Δ gpoa 5y change in gpoa QMJ paper
Δ roe 5y change in ROE QMJ paper
Δ roa 5y change in ROA QMJ paper
Δ cfoa 5y change in CFOA QMJ paper
Δ gmar 5y change in margin QMJ paper

Safety

Balance-sheet strength: leverage, Altman Z-score components, Piotroski F-Score elements.

Ratio Formula Source
leverage (ST+LT debt) / Assets Inverted: lower is safer
working_capital_ta WC / Assets Altman Z-score
retained_earnings_ta RE / Assets Altman Z-score
ebit_ta EBIT / Assets Altman Z-score
equity_liab Equity / Liabilities Altman Z-score
revenue_ta Revenue / Assets Altman Z-score
curr_ratio_inv 1 / (CA / CL) Piotroski F-Score
ocf_liab OCF / Liabilities Piotroski F-Score

From ratios to a single number

  1. For each ratio, compute the cross-sectional rank z-score across the universe (robust to outliers and units).
  2. For each pillar, average those z-scores, then z-score again. Missing ratios are tolerated (e.g. financials have no Gross Profit).
  3. Drop firms flagged insolvent by the Altman Z-score (Z < 1.81).
  4. Take the top decile, capped at 40 positions. Weights proportional to quality.