The First Cut: Stocks With Low Accrual Ratios

by John Bajkowski

The First Cut: Stocks With Low Accrual Ratios Splash image

The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAII’s Stock Investor Pro screening software is used to generate the First Cut listing.

Are earnings from all companies equally comparable?

The answer is no and has much to do with accrual accounting, which attempts to match expenses to revenues when the revenues are recognized. Accrual accounting introduces many interpretations and estimates by management into the financial statements. Decisions regarding the recognition of revenue, creation of reserves against losses, build-up of inventory, and even extension of credit to customers are examples of factors that may impact earnings comparability. A number of studies have found that it can be profitable to build portfolios with companies that actually generate more cash than their accrual earnings indicate.

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John Bajkowski is president of AAII.


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