Memorandum
I. Profitability is an output, not a structure
Profitability is often treated as a structural attribute—something a company “is.” This is a category error. Profitability describes what a structure is producing under present conditions. It does not describe the structure itself.
A structure can produce impressive margins while it remains dependent on conditions that are neither durable nor negotiable. Outputs can be observed. Endurance must be established.
II. The seduction of ratios
Return ratios and margin metrics compress complex realities into a single number. This compression is useful for description, but dangerous as a proxy for classification. Ratios tell you what happened within a bounded window. They do not disclose what the structure must endure.
When ratios become the foundation of analysis, structure is inferred from outputs. That inference is frequently wrong.
III. Two entities, same performance, different endurance
Two entities may display identical profitability under stable conditions. Only one may be structurally capable of sustaining it. The difference is not “quality.” The difference is constraint.
Profitability can be achieved by structures that remain rigid, refinancing-dependent, or exposed to non-discretionary obligations. In such cases, profitability is not a sign of resilience. It is a sign that conditions have not yet tightened.
IV. Why ABSA treats profitability as a late variable
ABSA treats profitability as a late variable because it is downstream of structural properties: discretion, constraint, and dependence. Structure governs what can be sustained. Profitability describes what was sustained during a particular interval.
This is not an argument against profitability metrics. It is an argument against using them as primary evidence of endurance. Classification must precede interpretation.
Boundary Statement
This memorandum defines a hierarchy of interpretation. It does not disclose operational definitions, normalization doctrine, thresholds, or classification governance.
V. Consequence for valuation
When profitability is treated as a structural property, valuation inherits an unexamined assumption: that outputs are durable. ABSA rejects this assumption. Valuation is admissible only after structure is classified.
ABSA does not provide investment advice and does not solicit transactions. This memorandum is interpretive doctrine only.