Sloan Ratio

The Sloan ratio measures how much of a company's reported income is accruals — accounting entries — rather than actual cash, computed as (net income - operating cash flow - investing cash flow) / total assets. It grew out of Richard Sloan's 1996 research showing that earnings built on accruals are less persistent than earnings backed by cash, and that the market is slow to price the difference.

Sloan's study found the effect was tradeable: firms with the lowest accruals outperformed firms with the highest by roughly 10 percentage points a year over his 1962-1991 sample, one of the earliest documented earnings-quality anomalies. The intuition is simple — income that arrives as receivables, inventory buildup, or capitalized costs has more ways to reverse than income that arrives as cash.

Common screening bands: within plus-or-minus 10% of total assets is unremarkable, and readings beyond plus-or-minus 25% flag earnings dominated by accruals. Like every quality flag, it produces false positives — a company in a legitimate investment ramp can post a high ratio for honest reasons, so pair it with the cash flow statement rather than reading it alone.