Purpose – The purpose of this paper is to investigate the profitability of European Union (EU) firms with the aim of confirming the mean‐reverting pattern documented by earlier research in the USA. In addition, the paper classifies firms by industry sectors across countries to investigate potential differences.Design/methodology/approach – The paper follows closely a model where the forecasting of profitability is done through year‐by‐year regressions. This approach allows the use of large samples and the year‐by‐year variation in the slopes. Both a linear and a nonlinear partial adjustment models are used for forecasting profitability.Findings – Findings show that the profitability does follow a mean‐reverting process and that profitability forecasting can be improved substantially by exploiting the mean‐reverting feature. Further analysis shows that mean reversion does not play an important role in EU countries as in the USA and there is no evidence of nonlinearity in mean reversion. It was also found t...