Earnings is the main word that holds the greatest importance on stock market. Ironically, earnings is not real money. $1 in earnings does not equal $1 in cash a company has to spend. Earnings contain a lot of non cash earnings which is called accruals.
It was first documented by Richard Sloan of the University of Michigan in 1996. Click here for the full research paper. He has written a number of academic papers comparing the future 12-month stock performance of companies that report earnings with a high degree of accruals versus companies that report earnings with a lower degree of accruals (i.e., earnings closer to, or even below, cash flow). Specifically, he measures the degree of a company’s accruals by an “accrual ratio,” which divides total accruals by the company’s net operating assets (NOA).
Thus, he gave birth to what we now know as the Sloan Ratio.
Click on read more to see how this ratio is calculated.
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