The Accrual Anomaly and Earnings Quality
Not all earnings are created equal. Richard Sloan's seminal research in 1996 proved that companies with high non-cash earnings (accruals) tend to underperform significantly in the future. Wall Street often prices stocks based on headline EPS, completely ignoring the cash-flow backing of those earnings.
Our Quantitative Implementation
Our screening engine calculates the Sloan Ratio dynamically for every ticker in our universe:
- Sloan Ratio = (Net Income - Operating Cash Flow - Investing Cash Flow) / Total Assets
- Strict [-10%, 10%] Band: We instantly reject any company whose Sloan Ratio falls outside this band, classifying them as having "Accrual Anomalies."
- Result: By demanding that earnings are backed by hard cash flow, we eliminate accounting manipulation and secure a mathematically robust margin of safety.
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